How can we fund an extension?

http://www.theguardian.com/money/2015/aug/27/how-can-we-fund-an-extension

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Q In June this year we bought a semi-detached house requiring modernisation for around £400,000 with a 90% mortgage. We have already re-plumbed it but still need to redecorate the whole house.

We also want to have a single-storey extension built to make a large family living/dining kitchen and downstairs loo. We know it will be worth it as neighbours with a similar sort of kitchen extension and modernised interior sold their house at the end of 2014 for £532,000. We probably need £60,000 for the extension. By next summer we hope to have saved £35,000. We both currently work full-time but to make matters interesting, have a baby on the way. How can we fund the remaining £25,000 in order to extend next summer? JS

A The obvious answer for funding home improvements, which is to increase your current mortgage, may not be an option for you. To borrow an extra £25,000 while keeping the mortgage at 90% of the value of the property, by next summer your house would have to go up in value to £427,778 – a rise of just under 7%. And even though the improvements you plan to make will increase the value of the house by substantially more than this, you are unlikely to find a lender willing to lend on a projected value – but there’s no harm in trying.

If you want to repay the £25,000 over the same term as your current mortgage one way would be to take out a personal loan secured on your home. But this type of loan can be expensive and paying back over a long term means a much bigger interest bill. As you are currently managing to put away £3,500 a month (assuming £35,000 saved up over ten months), an alternative could be to take out an unsecured personal loan to be paid off over a much shorter term of between one and five years. But it also makes sense to raise the £25,000 by combining a personal loan with a 0% credit card. It’s unlikely that you will be able to use the credit card to pay the builder but it will be useful for buying all the fixtures and fittings, domestic appliances and anything else you can buy from a shop that will be needed for your extension. And you typically have a year to repay what you’ve borrowed if you want to avoid paying interest. It’s also worth bearing in mind that you are unlikely to need the £25,000 upfront as soon as building work starts. So you might want to consider waiting until you actually need the money – and know how much – before you take out a loan.

Muddled about mortgages? Concerned about conveyancing? Email your homebuying and borrowing worries to Virginia Wallis at virginia.wallis.freelance@theguardian.com