Mortgage paying off/affording extension question

[Cloo]

We are going to speak to a financial advisor about this, but to just crystalise my thoughts I'd be interested in people's thoughts on this. And yes I realise I am very very lucky and a lot of people are financially in the shit right now but I could do with some Suburban help thinking this through as there are some Big Decisions involved.

I received an inheritance from my late grandfather 3 years ago. Some of it is in ISAs etc, I have been using some of it to draw down money and pay off our mortgage each month because, until our fixed rate ends at the end of June, there's a early repayment fee that was quite hefty (certainly until last year). I have more than enough to repay whole mortgage.

I had hoped to use remaining after mortgage to pay for loft extension which we don't 'need' as such, but our roof is in crappy condition and it seems kind of silly not to stick rooms in there while overhauling the roof if we can, and assuming our kids will probably have to live with us until their mid 40s or something unless something changes, an extension to make it easier for young adults to cohabit with us would be no bad thing.

We were quoted for a loft extension pre COVID, and on that quote I'd have enough to do both with what I have. However I know building and builder costs have rocketed since then, so assume it's around 20% more, which pushes it to risking being every penny of my savings to get it done. And we could also do with generally giving the house a facelift, repaint, repointing etc as right now we're kind of letting the terrace down.

gsv doesn't always have savings but he can very quickly build them up when he takes a contract as he can charge a hefty day rate and we are not massive spenders generally - he's been working on developing his own bit of software for the last 6 months off the back of savings that rather than working for anyway, so his financial situation is sort of wibbly at the moment. He may be doing a mixture of consulting and trying to flog this software in next 18 months.

I'm wondering if I should pay mortgage off in full as planned before end June, or whether it might be better to pay off most of it and leave a 5 figure sum to repay at a smaller montly repayment (as I understand it does or can work that way) and treat that as a loan to cover doing the loft sooner without risking running out of cash? Or are there other approaches I haven't thought of?

 

[contadino]

Is there still an early repayment fee?

I've been a lot more relaxed about work/money since paying off my mortgage. I don't think you can put a price on the change of attitude.

I had an extension put on the house at the end of last year and would recommend you get an updated quote. The price of materials for ours more than doubled between Feb 21 and July 22.

If it were me, if you don't need the extra space now then keep saving or spend the money on other things. We had the insulation ungraded, new windows put in, etc.. and those things have had a marked effect on our bills since.

 

[MickiQ]

When we had the extension built back in 2004 we put half down ourselves and borrowed the other half. The Halifax took what was left on our existing mortgage which was only about three or four years at that point and transferred it to the new mortgage which ran for 10 years on from then. I can't remember the exact figure now 20ish years later but I don't think we paid much extra per month even though we had a whopping great extension on the back of the house. Obvs we paid for longer than we would have done but that was an extra benefit to us since when we took out our original mortgage it was in the days when people thought endowments were a good idea and if we hadn't extended the mortgage I would have had to find about £10K when the original due date fell.
Talk to your lender they might offer better advice than us.

 

[Cloo]

Is there still an early repayment fee?

I've been a lot more relaxed about work/money since paying off my mortgage. I don't think you can put a price on the change of attitude.

I had an extension put on the house at the end of last year and would recommend you get an updated quote. The price of materials for ours more than doubled between Feb 21 and July 22.

If it were me, if you don't need the extra space now then keep saving or spend the money on other things. We had the insulation ungraded, new windows put in, etc.. and those things have had a marked effect on our bills since.

I think repayment fee is pretty small now only about a grand. I definitely want to pay off if possible.

Interesting about spending on other things, about a year ago I did suddenly think - 'Fuck it, leave the extension - we probably need to replace the windows in next 5 years, we could do the exterior of the house, get wood floor downstairs, redecorate son's bedroom, do the garden nicely and have money aside for when we need a new kitchen in 5+ years instead'

Maybe the starting point might be getting loft quote again - if it's going to be massively bigger cost then maybe that swings it.

 

[kebabking]

I'd - personally - be thinking of paying off the mortgage first (perhaps keeping a peppercorn mortgage for credit purposes, and makes it quicker if you need to remortgage in a hurry). We had an extension done last year, having planned it pre-covid, and the costs had increased by 50%+.

The positive mental effect that contadino speaks of having payed off the mortgage was, for us, an incredible liberation. It was worth far more to us than had our income gone up by the mortgage payment...

I'd get the house up to spec before I sorted out the extension - not least because if you need to sell, and your house looks a bit unkempt, buyers are reducing their offer price before they walk in the door, not thinking how much they can afford to go up to.

 

[Cloo]

Thanks - we're not imagining we'll sell in the next 15 or so years unless something changes radically, but yes, it would be nice to do it up as a whole. If loft costs have really gone up that much, then it really might be a no-go. The guy we were most likely to go with was most expensive, but also really well reputed and used by our neighbours to do basically the exact same thing we want to do) could probably re-quote us pretty quickly. I could probably just contact him again with previous quote and say ask what it would cost now and he could tell us straight up I imagine without having to revisit.

 

[Jimmy Don't]

If the roof needs doing any time soon, and it's being taken off, even partially, and if you are putting up scaffolding anyway, I'd do the conversion while you are up there. More economic and only 1 bout of fuckery.

 

[Cloo]

Yeah, that's been kind of my thinking Jimmy Don't - we need to establish more precisely what might be up. Last time I had roofers look at it they didn't actually reckon the whole thing had to go, mainly back section.

I've actually emailed loft bloke just now to ask if he can say what cost would be presently as if it is, say 50% more than we were quoted - which was actually just over 2 years ago, no pre-COVID I realise - that might be a decider. The other big question is how attached my other half is to doing it (I expect fairly) I can take it or leave it and be quite happy to just do other overhauls, but he might be really gutted by the idea of not doing it. Especially as we have a problem that our bedroom square window bay means it's really hard to black out the windows completely and he has a real issue with being woken by morning light in summer - though it did occur to me that if we spend money on replacing the windows (which I'm pretty sure are nearing end of FENSA guarantee) we could engineer a much better light-blocking solution while doing that, as current arrangement makes blinds tricky.

 

[existentialist]

We are going to speak to a financial advisor about this, but to just crystalise my thoughts I'd be interested in people's thoughts on this. And yes I realise I am very very lucky and a lot of people are financially in the shit right now but I could do with some Suburban help thinking this through as there are some Big Decisions involved.

I received an inheritance from my late grandfather 3 years ago. Some of it is in ISAs etc, I have been using some of it to draw down money and pay off our mortgage each month because, until our fixed rate ends at the end of June, there's a early repayment fee that was quite hefty (certainly until last year). I have more than enough to repay whole mortgage.

I had hoped to use remaining after mortgage to pay for loft extension which we don't 'need' as such, but our roof is in crappy condition and it seems kind of silly not to stick rooms in there while overhauling the roof if we can, and assuming our kids will probably have to live with us until their mid 40s or something unless something changes, an extension to make it easier for young adults to cohabit with us would be no bad thing.

We were quoted for a loft extension pre COVID, and on that quote I'd have enough to do both with what I have. However I know building and builder costs have rocketed since then, so assume it's around 20% more, which pushes it to risking being every penny of my savings to get it done. And we could also do with generally giving the house a facelift, repaint, repointing etc as right now we're kind of letting the terrace down.

gsv doesn't always have savings but he can very quickly build them up when he takes a contract as he can charge a hefty day rate and we are not massive spenders generally - he's been working on developing his own bit of software for the last 6 months off the back of savings that rather than working for anyway, so his financial situation is sort of wibbly at the moment. He may be doing a mixture of consulting and trying to flog this software in next 18 months.

I'm wondering if I should pay mortgage off in full as planned before end June, or whether it might be better to pay off most of it and leave a 5 figure sum to repay at a smaller montly repayment (as I understand it does or can work that way) and treat that as a loan to cover doing the loft sooner without risking running out of cash? Or are there other approaches I haven't thought of?

Back when I was young, the general advice was to get rid of unsecured debt, overdrafts, etc, then pay down mortgages, but (the smart advice went) always maintain some liquidity. So I reckon paying down your mortgage as far as you can while still keeping a reasonable chunk where you can get your hands on it fairly easily is the way to go. How big that chunk needs to be is a nuanced decision that only you can make

 

[Cloo]

Yeah, I'm quite interested in the idea of keeping a nub of mortage to keep option of remortgage open, definitely one to ask financial advisor about.

 

[moonsi til]

I would pay the mortgage off in full. I can’t think of a reason why keeping a peppercorn mortgage would put you at an advantage over a mortgage free home that has value?

 

[pbsmooth]

As mentioned I fear 20% more will be a massive understatement, slightly dependent on where you are. I assume as more people stop spending due to well everything, quotes may come down a touch but still reckon the work could be much more than you think.

Could you not invest/save the amount for a deposit for kids rather than planning to have them with you?

and dunno about you but wouldn't underestimate losing the storage space of the loft!

 

[baldrick]

I think the loft will be more than you think - but the backlog of jobs since Covid means that in demand trades have got long waiting lists. A friend waited a year to get his extension done and would have been more had they not had a cancellation.

So I think you have time to save up your loft extension money. I wouldn't use all your savings on mortgage/loft either. They say six months of salary is a good benchmark for savings so I would put that aside, see what you have left and what you can save in the next 12-18 months and then decide.

 

[xenon]

My gut feeling is pay the mortgage off. Get away from the bank having a stake in your home. If you need to save then for repairs just put that money aside each month.

 

[Cloo]

We don't use the loft for storage, so that's not an issue. I think if we didn't use the money for loft there's plenty else we might need it for - our car's going to die (or get written off by even the most minor prang) within the next few years, the windows will need replacing stuff like that. Oh, and son's bar mitzvah next year

I'm expecting it may be a year or two before anyone good will be available right now, yeah. If we do do it and have a wait I guess we can use intervening time to sort out party walls etc.

 

[Puddy_Tat]

dunno really.

general accepted wisdom is it makes sense to pay off most expensive debts first - mortgage is usually the cheapest form of loan (especially if you fixed the rate at the right time)

but it's also general accepted wisdom to have some money readily available in case of emergency - depending on who you ask, 3 month to a year's normal income. getting a loan if you're unexpectedly in the shit is going to be more difficult and more expensive.

is there a chance you'll need to borrow at future to fund the loft conversion / other work? potentially at higher personal loan type rates? or re-mortgage at a later date which might involve arrangement fees and a new valuation and all that sort of thing? will that work out more expensive than paying off mortgage sooner?

not entirely sure about the advantages of peppercorn mortgage - may be easier to take out a new chunk of mortgage on the existing one if you need to rather than starting from scratch.

keeping a tiny amount on mortgage may also mean that lender will look after your deeds etc, but you may have a solicitor who will do that for you, and i have a feeling (others may be able to confirm or otherwise) that now property ownership is registered electronically, the loss of deeds isn't such a big deal as it used to be.

 

[Cloo]

I basically have a personal preference to always keep a large-ish buffer of savings come what may and I prefer to do things without borrowing, which was why I was hoping to use the money for the loft if we were going to do it. But I also didn't want to risk having nothing left after the work, ie, I wanted to have a chunk available on top of whatever we were quoted given a) cost creep and b) the actual cost of decoration and fitting a bathroom up there, which isn't included in the builder's quote (it was basically up to wired, basically plumbed and plastered).

 

[kabbes]

Cloo, the reason why the financial advisor is important is because there is no generic answer to your question. It massively depends on all the details of your personal circumstances — all your current financial details and arrangements, your current personal circumstances, your future intentions, everything. It wouldn’t be ethical for me to even attempt to give you the “right” answer without knowing more than either you or I would feel comfortable divulging.

It is certainly generally important to have some liquid buffer in case of hard times. (It’s also important what you do to store that buffer). It’s also generally a good idea to pay off expensive debts before worrying about other options. But even those generic rules can be broken sometimes. For now, I would try to simply make a note of all your financial commitments and assets and, as accurately as is realistic, your short and long term goals. Those are what a good advisor will need.

 

[Aladdin]

Listening to economists they're all saying save save save and don't spend.

But ... a roof is not something you can leave alone if there's an issue.
I would definitely sort the roof out and get the basic insulation plus veluxes plus partitions in there. You can always complete later. If you're not thinking of putting a bathroom up there then you wont have to fork out as much on plumbing at this stage.

I would put a chunk into knocking back the mortgage and sign up to another 5 years fixed rate...on whatever is left to pay.

In that time I would save as much as possible..and after 5 years I'd look again at what's needed.
It could be college / University fees. Or anything that might happen.

Having the attic ready for next step is always handy. And it wont count as a room for tax purposes until ita finished... (well that's how it is here..may be different there)

Best of luck whatever you decide.

 

[Puddy_Tat]

Having the attic ready for next step is always handy. And it wont count as a room for tax purposes until ita finished... (well that's how it is here..may be different there)

it is probably different here - local taxation in england is 'council tax' which is in bands, based on a rough valuation of the property in something like 1991 (it was introduced in one heck of a hurry to get rid of the poll tax) - i'm not sure if it's the same round the rest of the UK - scotland got the poll tax before england, and poll tax never happened in n ireland as the thatcher government didn't want to give everyone a shared reason to hate them.

i'm not sure what happens to council tax if you do extend a place significantly - whether it keeps the existing council tax band or if they have to re-value it or what? it's not something i've ever had to give any thought to...

 

[kabbes]

i'm not sure what happens to council tax if you do extend a place significantly - whether it keeps the existing council tax band or if they have to re-value it or what? it's not something i've ever had to give any thought to...

Theoretically, it can be revalued when it is next sold. I don’t know how much that happens in practice though.

 

[contadino]

Theoretically, it can be revalued when it is next sold. I don’t know how much that happens in practice though.

There was a section in the planning application form about whether the work would put the property in a different band.

 

[AnnO'Neemus]

I would pay the mortgage off in full. I can’t think of a reason why keeping a peppercorn mortgage would put you at an advantage over a mortgage free home that has value?

I don't have a mortgage, bought my council flat under the Right to Buy* using the compensation from a medical negligence claim. There have been times when I would've liked to borrow money to do up my flat, but couldn't take out a personal loan due to poor credit history - my bank wouldn't even let me have an overdraft, because that's classed as 'unsecured lending'. I understand that if I'd had a mortgage, it would've been easier to remortgage/take out equity, because it's secured against the property. So that's why it makes sense to keep a small mortgage going, because you're already a borrower with an ongoing relationship with the lender, or even if you apply to remortgage with a different lender, you have a track record of making the payments.

* I know that's not the done thing on Urban, but given that I had relatively cheap rent, I could've just blown the money on nice holidays and a fancy car, but I wanted to buy my flat, because by then I'd lived there for several years, it was my home, but while I was out of work for four years having several operations, I had a nightmare being on benefits, in particular the council fucked up my housing benefit claims. It was a classic case of the left hand doesn't know what the right hand is doing - the council's housing benefit department failed to pay the council's rent collection department, and the different departments wouldn't talk to one another to sort out their cock-ups 'because data protection,' so I ended up in around £1k worth of rent arrears while not working, in receipt of benefits and legally entitled to housing benefit. It went to court, I explained the council's fuckwittery to the judge and he explained that unfortunately he couldn't order the relevant departments to talk to one another, but what he could do was stay the proceedings, sort of leave them in a pending file, rather than rubber stamping the possession order, which was very kind of him. I paid off the arrears (which I should never have owed in the first place), out of my medical negligence settlement, but I ended up buying my flat because I wanted more security of tenure and not to risk rent arrears/repossession/eviction in future.

 

[AnnO'Neemus]

Yes, it's like to be a lot more than a 20 per cent bump. I'm in some house-y groups on Facebook, people talking about doing DIY or getting contractors in to do work, and my vague recollection is that people talk about huge increases, and that's if they can get anyone to quote at all.

I had my bathroom done late last year, I even told him that I potentially wanted my kitchen doing this year, thinking if there was a carrot of more work in future, he'd do a good job. It's an okay job, but the finish isn't very good. Basically, I don't want to use him to do my kitchen, and can't even bring myself to begin to start looking for someone else.

 

[DownwardDog]

Too many variables to offer any useful counsel without seeing the real numbers...

Generally, if there is something else you can do with the money that makes more than the mortgage interest rate (through capital gains or income generation) then do that. You'd probably be better off in the long term (10+ years) by getting an IO mortgage on a BTL property than paying down the balance of the mortgage of the house you live in.

 

[kabbes]

Generally, if there is something else you can do with the money that makes more than the mortgage interest rate (through capital gains or income generation) then do that.

Yes, agreed. Although I would note that as mortgage rates climb, it becomes harder and harder to find something else that will reliably achieve this superior return after tax.

You'd probably be better off in the long term (10+ years) by getting an IO mortgage on a BTL property than paying down the balance of the mortgage of the house you live in.

This I am way more doubtful about. BTL is not a good investment class (not least because it’s often all that most people can imagine doing with their money, meaning that it’s too competitive). Tax heavily counts against you, for a start. Up-front stamp duty will cost you something like 6% of the property. You’re paying tax on the rent in excess of the mortgage, and may even be paying some tax on the rest of the rent too. You’re likely to get clobbered with capital gains tax on sale if you’re holding it for more than 10 years. All these tax issues alone make the return difficult to beat the mortgage rate on your own property. In addition, you have the costs of remortgaging every few years, you have lots of costs on maintaining the physical asset, you have void periods, you potentially have management fees and ground rent. And then you have the hassle of dealing with the tenancy — your time is worth something too. Finally, property is “all or nothing” — you can’t sell just a bit of it if you need the money, and selling it at all can take months or even years.

All said, you can get dividend income from an equity fund that is at least as good as the rental income from a BTL but without any of the tax difficulties or the personal hassle, and it is also easy to instantly sell bits of the fund as and when you need it.

 

[Elpenor]

Friends are currently having a BTL nightmare (I’m not that sympathetic to their plight!); it’s effectively buying shares in one company and that’s quite a risky strategy I believe

 

[moonsi til]

Great post kabbes about BTL

 

[jontz01]

I was forced to to sell my bus not long ago and used the cash to clear up the mortgage. I haven't legally released the house from the bank though, so we don't owe anything but can still re-borrow at the drop of a hat without doing any paperwork. This is in NZ though, I'm not sure if the same applies here. The freedom of not having to make those monthly payments is life-changing and has meant that I can take risks with my time which are often really rewarding both financially and mentally.

 

[tep]

I would pay the mortgage off in full. I can’t think of a reason why keeping a peppercorn mortgage would put you at an advantage over a mortgage free home that has value?

I might be totally out of sync with society but i can't understand why anyone wouldn't get it paid off and be free from debt. Once you get past that milestone then there is time to work on the other shackles...and then descend into a very enjoyable 'whatever it is that lights up life' , books, wine, walks, herbs, food, friends, films, clouds, pets, walks, or just work on being an interesting and vaguely useful character that is well known about the parish.