Should you move or improve?
The housing market downturn, which started in 2007, shows little sign of easing up before the end of 2009, spelling potential problems for thousands of household. Because, while many people have put off their plans to buy a new home until things are more settled, many families struggling with a lack of living space have no choice.
Moving to a bigger house in the current housing market could be a nightmare. Not only will the whole process take longer to complete, but you’ll also face much larger mortgage payments at a time when you’re likely to be feeling the pinch.
That’s why Jackie Carr from Maidenhead in Berkshire opted to extend her current home rather than move when it turned out that a surprise pregnancy meant she and her husband, Mike, were expecting twins.
"We already had two children and simply could not afford to move from our two-bedroom terrace, which we bought for £235,000 three years ago," says Jackie, a 37-year-old full-time mum. "So we had a conservatory built, and this freed up one of the downstairs rooms that we turned into our bedroom. The work cost £9,000, which thankfully Mike’s mum offered to pay for."
It looks like the Carrs made the right decision, and as the housing market continues to slow, more space-strapped families will be making similar choices. House prices continue to fall, and activity in the property market has also slowed. At the same time, mortgages are still more expensive than they have been in the recent past and lenders are demanding bigger deposits from borrowers.
Extend, renovate, revamp
It’s little wonder then that recent research from home insurer LV= has revealed that almost one million homes in the UK will be extended, renovated or revamped over the coming 12 months rather than sold, as owners are worried about the effects of the downturn in the economy.
One of these homes belongs to Lee Emery, 29, and his partner, Lucy Pope, 28, who bought their first home in Iford, Bournemouth, back in 2006. The pair paid £213,000 for the two-bedroom bungalow which was in need of extensive repair.
"I enjoy DIY and Lucy doesn’t object to getting her hands dirty so our intention was to do up the property, make some money and buy a bigger family home a couple of years down the line," explains Lee, a public sector worker.
Unfortunately, the credit crunch and falling house prices put paid to their plans, so the couple has opted to do work on their current house. This month, a team of builders will start converting the loft of the bungalow into two large bedrooms - one with en suite and the other one with a family bathroom.
Before you roll up your sleeves and follow Lee and Lucy’s example, however, there are a few things you need to consider. It’s not a straightforward case of ‘deciding and doing’ - planning permission may be required and building regulations must be met. Jackie and Mike were lucky in that their conservatory was regarded as a ‘temporary structure’ and so did not require planning permission. "We couldn’t have afforded the planning application and architect’s fees for a permanent structure," says Jackie.
But, depending on the type of improvement, other homeowners simply have to swallow these costs. In most cases, planning permission will be required if the extension exceeds 70 cubic metres of the property’s original space.
For terraced houses, this limit is lower at 50 cubic metres of extra volume, while larger houses can be extended by up to 115 cubic metres without planning permission. For more details about planning applications and costs, visit planningportal.gov.uk.
You will also need to adhere to building regulations which ensure all materials are fireproof and access around the house is not blocked. In this case, it’s crucial to hire professionals and avoid the temptation of DIY beyond your means.
Dean Sanderson, managing director of Sanderson James estate agents in Manchester, has been flabbergasted by some of the home ‘improvements’ he has seen which have actually knocked thousands of pounds off the property’s value.
"I’ve seen loft conversions where people have removed the lateral restraints [the vertical timbers in the middle of the loft holding up the ceiling] to create a bigger space. But the purpose of these is to support the entire structure of the house," he says.
There are also other considerations. If your property is leasehold, you will need clearance from the freeholder before embarking on any major home improvements, even if you have planning permission and have met building regulations.
And don’t forget insurance. Emma Holyer, a spokesperson at LV=, says: "Anyone planning an extension or significant building work should inform their insurer before they start and check that their builders are also fully insured." When the work is complete, you will also need to reassess any increased value in building and contents cover, she adds.
Lee and Lucy didn’t need planning permission because their improvements didn’t exceed 70 cubic metres - but the cost of the work will still set them back between £40,000 and £55,000, according to a range of quotes obtained by Lee.
Raising the money
So, in the middle of a credit crunch, what’s the best way to pay for the work?
One option is to take a further advance on your mortgage. However, this is becoming increasingly difficult, warns Louise Cuming, head of mortgages at Moneysupermarket.com. "Not only is the value of houses falling, many lenders will now only lend up to 90% of this new lesser value. Also, the additional part of the loan is likely to be priced on the lender’s more expensive standard variable rate rather than any deal rate that applies to the rest of the mortgage."
Lee and Lucy, who opted for a further advance, are lucky that they had their property valued before house prices tumbled. "The house was valued at £290,000 which meant we were able to release £55,000, taking our outstanding mortgage up to £260,000," says Lee.
The well-timed valuation also means the couple have a financial buffer, which could prove crucial, says Lee. "Our home is an old building and no doubt there’ll be unforeseen expenses - complications with boilers, piping and knock-on effects on the rest of the property like cracks in the wall. But, even if the buffer runs out, I’ll finish the project off myself by hanging doors, tiling and decorating."
If your valuation was not so well-timed, making a further advance impossible, there’s always the option of a secured loan. "These tend to be easier to qualify for and rates of less than 7% may be available, which is cheaper than most SVRs," says Cuming. However, even secured lending is becoming harder to access.
At the start of July last year, secured loan provider First Plus, which is part of Barclays, announced it would cease all lending to new borrowers from 9 August. Even the secured loan providers that are still lending are reluctant to do so if it leaves you with less than 10% equity of the current value, says Cuming.
In any case, home-improvers should tread cautiously around secured lending. They are otherwise known as ‘second charge mortgages’. This means that, just like your primary mortgage, if you can’t meet yours repayments your home is at risk and could be repossessed.
Providing your home improvement is going to cost less than £25,000 - according to Alliance & Leicester the average cost is £11,833 - an unsecured loan is a much better idea. According to Moneyfacts, this type of lending is one of the most flexible and free of charges.
It’s also worth investigating credit cards that carry a 0% interest for a given time period.
Alternatively - if you have a good credit score - you could pay off any loan with a credit card that offers 0% on balance transfers, such as Capital One’s Platinum card, which offers this perk until October 2009.
While borrowing in the current climate may not be ideal, the good news is that, providing the work is carried out professionally and to a high standard, you’re likely to make up the expense through the increased value of your property.
According to research from GE Money Home Lending, the most value-adding home improvement is a loft conversion, which can increase the value of the average home by more than 12% (or £22,898). Building an extension came next with a potential boost of £19,800, while a conservatory could add £12,229 to the price. But, given the uncertain outlook for the property market, home improvers would be wise to take this with a pinch of salt.
Lucy and Lee are hoping their loft conversion will boost the value of their home to about £320,000 from its current £260,000. "But whatever it’s worth, we’ll still have a bigger mortgage to pay, so we’re not taking it lightly," says Lee.
On the other hand, Jackie and Mike, with their four children, simply don’t have time to think about it. "We added this conservatory as we were desperate for more space and could not afford to buy a bigger home," says Jackie.
"Having more room without the stress of moving has been fantastic, but we still have two kids to a room. In the next few years, we’ll have to think about more space again. It may have to be the loft next time."
Unsecured loans mean the loan is not secured on any asset you already own, such as a house, car or other assets and so is a riskier prospect for the lender. Therefore, they usually come with higher interest rates than their secured counterparts, are less flexible and levy high redemption penalties. Most “personal” loans are unsecured.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
The right to hold or use assets (generally property, but also vehicles) for a fixed period of time at a given price, without transfer of ownership, on the basis of a lease contract. Leasehold ownership of a residential property is simply a long tenancy, the right to occupation and use of the flat for a specified period – the ‘term’ of the lease, which is fixed at the beginning and so decreases in length year by year and the property can be bought and sold during that term. When new, leases are for 99 or 125 years until its eventual expiry, whereupon ownership of the property reverts to the landlord.