In the first nine months of 2021, there were nearly 250,000 planning consents granted in England for home improvements and extensions. This represents an increase of 36% in the preceding 12 months and a growth of 19% above the pre-pandemic norm.
As people have spent more time at home in recent years, they have chosen to invest in improving their living space and, with builders and building supplies in high demand, the cost of these renovations is increasing.
So, how are customers financing this record number of home improvements? A traditional route has been through capital raising with a remortgage, but this has its limitations. If a customer is in the middle of a deal, there may be Early Repayment Charges, but holding off until the end of the term may not fit with their plans. Some lenders may be able to offer a further advance, but many do not.
The alternative could be to take out a second charge mortgage, which can prove to be the smarter choice for some customers. To begin with, a second charge mortgage can be taken without disrupting the first charge mortgage and incurring any penalties.
More importantly, however, in many instances, the improvements are likely to result in a significant increase in the house price. It can be beneficial for a customer to take a second charge mortgage to pay for the work and then remortgage at the higher property value and, therefore, a lower LTV in the future.
This approach is likely to open up more options for the customer when they do come to remortgage and it could mean that they benefit from a lower rate as a result. In the right circumstances, the ability to shift their entire balance onto a lower rate in the future could prove more financially beneficial than capital raising with a remortgage at the outset. When it comes to financing home improvements, sometimes the smarter choice is a second charge mortgage.
Caroline Mirakian is sales director, second charge mortgages, Pepper Money
