Many of our home extension clients ask the same question: Does a home extension make financial sense? It’s a good question to ask. A home is one of the biggest purchases many of us will make, so we need to think carefully about the money we invest into it.
At Communion, we suggest our clients consider three things to answer this question:
- financial situation
- what ‘worth it’ means to them
Here’s what we mean…
Home extensions make sense as a medium- to long-term investment
In terms of seeing a financial return, a home extension is something you should be thinking of as a medium- to long-term investment – say five or more years.
As house prices typically double every ten years, if you plan to stay in your home longer term, it is likely that your home extension will become, in terms of financial profit, worth it. You will also have had years of enjoying your home extension.
Short term, it’s best to think of an extension as an investment for you – your enjoyment, quality of life and comfort – not an investment for profit.
If you’re not planning to stay where you are for the long term, we suggest a better way to realise value is to gain planning permission for the extension, but not build it. The value that planning permission will add to a property is typically far more than the cost of securing it, making it a ‘quick win’ in comparison to actually building the extension.
Your situation determines the ‘value’ of a home extension
We encourage our clients to think about their situation before making a decision about a home extension.
Let’s say your property is currently valued at £250,000 and you want to add an extension that will cost £100,000 to build. If you add the extension, your property may only be worth £325,000. In simple financial terms, the figures don’t really add up, but in some instances our clients will build the extension, as they believe it to be of sufficient ‘value’.
Let’s look at two simple scenarios to explain why.
In scenario one, the mortgage on your property is £200,000 and you would need to extend the mortgage by £100,000 to finance the extension. In this scenario, the home extension would not be worth it, because you could be at risk of negative equity.
In scenario two, your mortgage is much lower, say £50,000, and you could finance the extension with savings or only a small extension to your mortgage. In this situation, although the crude numbers don’t add up (that is, £250,000 + £100,000 does not equal £325,000), your equity in the property is much greater than the cost of the extension. In this instance, you may feel that a home extension is worth it.
Other ways to assess whether a home extension will be worth it
If you are planning to stay in your home for the long term and you can justify the financial investment, there are some other things you can think about to help you assess whether a home extension will be worth it.
Look at alternative properties
If you’re thinking about a home extension, it is worth reviewing the market to see if your perfect home is already out there. There are three reasons for doing this.
Firstly, if you can find the right house in the right location, with little or no work needed, moving may be a better option than extending what you already have. This blog article has more on this.
Secondly, it gives you a comparison to work with. It helps you identify a budget and answer the crucial question: is an extension on my current home worth it? For example, let’s say a great alternative home in the right area would cost you an additional £200,000 (factoring in the cost of the property and the cost of the move). However £100,000 is the full cost of an extension that would give you everything you need in your current home. In this case, it makes financial sense to build the home extension.
Thirdly, research may show you that the house you want doesn’t exist. Perhaps you can’t find anything in the right location. Maybe other properties lack the years of family history that you associate with your current home and you can’t imagine living anywhere else. Whatever the reason, if you’re not able to find a good alternative, a home extension could become of much greater value to you.
Remember that home extensions solve problems
As well as considering potential financial gain, it’s also worth considering the solutions to problems a home extension can provide. Could it fix the problem with the ageing, leaking conservatory? Will it give you a bigger kitchen that it will be easier to live life in? Will it improve the flow of your home? Will it mean you can open the back door and go straight into the garden? Will it give you space for an office? Does it provide a room so people can come and stay? Home extensions can be a great solution to these common problems.
You can go one step further and consider what’s to be gained from a home extension. If you have a bigger kitchen diner, will you able to spend more time together as a family? If you move the position of the sitting room, could you enjoy the sunset while sipping a glass of wine?
If your home extension creates your dream home and one you delight in living in, there will likely be a ‘value gain’ far greater than the financial cost. Or, to look at it another way, people spend a few thousand pounds each year to live in a beautiful villa for two weeks when they go on holiday. For a similar sum each year in mortgage repayments, you could have a home that you live in and enjoy all year round.
What’s more important: cost or value?
You can – and should – look at a home extension in terms of cost. You need to be sure that the investment you make in your home extension is one you can afford to make financially and won’t leave you in negative equity. But you should also look at a home extension in terms of the value it will give you.
If a home extension gives you the right amount of space in the right location and allows you to live your life as you choose, then we think it’s definitely ‘worth it’. Though the financial investment can be significant, the return on the investment is often greater still.
“One of the things that’s very important to both of us is a house that allows you live the way you want to live. We do a lot of entertaining and it really is a very functional house and it flows. We’re more than delighted with what we’ve got and we very much feel that it’s a house that’s unique to us.”
Susan, Communion Client