Want to do up your home? Get moving

A window of opportunity to save on a home extension will close this year, writes John Cradden

THE dilemma facing many families right now — about whether to trade up to a bigger or better home or stay and renovate/extend their current property — looks set to take on a greater urgency over the coming months. If you’re one of these families, you might be waiting and hoping that the Central Bank, in its forthcoming review of the mortgage rules that were introduced 18 months ago, will relax the rule that says you need to have at least 20pc of the purchase price of any new home, thereby opening up options for financing a house move.

On the other hand, maybe it’s the likes of Dermot Bannon, rather than Sherry Fitzgerald, that you should have on your phone’s speeddial, as the longer you wait, the greater the risk that you will miss out on the tax-relief scheme for home renovations, which is due to expire in December.

Launched by Michael Noonan in Budget 2014, the Home Renovation Incentive Scheme (HRI) offers a temporary window, in which homeowners can save 10pc on construction and upgrading work. The initial window was meant to last for just over a year, but has been extended twice in successive budgets.

Obviously, a decision whether to move or extend will depend on a whole range of factors beyond the economic, but it is worth looking at the options for financing an extension and the ins and outs of the HRI scheme.

If you haven’t built up a reasonable fund to pay for an extension (you can expect to fork out around €40,000 for a 40m squared singlestorey extension with an apex roof, according to an informal survey by Tradesmen.ie), then you can always look into a home-improvement loan from your bank.

The cheapest standard personal loan rates start at about 6.9pc from Ulster Bank (7.9pc if you’re not already a customer of theirs), 7.49pc from KBC (again, must be a customer) and 7.5pc from Bank of Ireland.

A loan of €40,000 will cost you nearly €8,000 if you are paying back over five years and at a rate of nearly €800 a month.

Loan vs mortgage top-up

But what about topping up a mortgage instead? Mortgage experts say banks will approve this as long as the total mortgage loan to value (LTV) is no more than 80pc to 90pc of the agreed post-renovation value of a house.

“If someone has a mortgage of €200,000 and they have a house valued at €240,000 and they want to do an extension for €50,000, the house’s final valuation after the works are done must be of a sufficient value, say €300,000, to support a total mortgage of €250,000,” said Ken Murray of the Association of Expert Mortgage Advisors.

But if you have, say, €15,000 saved up and you need another €25,000, then the difference in the total cost between these two financing options will be much tighter than you think.

“You’d have to get a quote from a solicitor, then compare the add-on costs. It also depends on what the underlying mortgage is, because if you have a tracker, you won’t want to switch. However, if you don’t, you could switch the whole loan and get a cash deal that banks do, which would negate the legal fees,” said Karl Deeter of Irish Mortgage Brokers.

The decision will likely centre on the monthly repayments. A personal loan would have to be paid off over a much shorter term, with a higher monthly cost, whereas with a mortgage top-up, you can spread the payments over the remaining term of the original mortgage.

Mr Deeter said that while the total cost of credit for a mortgage top-up of €25,000 over 20 years at 3.3pc would be higher (€9,184 as against €8,256 for a personal loan at 8.5pc, paid back over seven years), the monthly repayments on the top-up would be €142 vs €395 for the personal loan.

“That makes it a case of what does the person have a preference for? Lower interest in total or lower payments?” he said.

A mortgage top-up will make more sense than a personal loan if the amount needed is closer to €40,000 than €20,000, but you can always ask the bank about options for paying back the mortgage top-up over a shorter period, thereby still benefiting from a much lower interest rate.

But you’ll also need to have built up a reasonable amount of equity. Bank of Ireland, for instance, will require a maximum LTV of 80pc before it will give you an equity release mortgage. But it is also paying 2pc of all mortgages drawn down up to September 30 this year to customers as cashback — including equity-release mortgages.

Repayments on a €40,000 equity-release mortgage over 20 years at its current two-year fixed rate of 3.35pc would work out at €228 per month, whereas a personal loan of €20,000 at a rate of 7.5pc over 10 years would be €235 a month.

Tax relief

When figuring out the total costs of an extension or renovation, you should factor in the tax relief from the HRI scheme. The costs of securing services from relevant tradesmen or builders have probably risen in the time that the tax relief has been available, so it is all the more reason to make sure that you can claim.

In theory, it shouldn’t be too late to take advantage of the scheme before it stops at the end of this year, but you’ll need to get your skates on to find suitable contractors and have a plan that can be completed by this December.

You may have more problems in getting the applications in for the tax relief in reasonable time because the onus on submitting the application rests not with you but with the contractors or tradesmen doing the job.

So what can you claim? Basically, you are entitled to claim back VAT at 13.5pc on qualifying expenditure between €5,000 and €30,000 undertaken any time between October 2013 and December 2016. You can commission jobs to any cost — €100,000 if you like — but only the VAT on the first €30,000 is applicable. The minimum amount you can reclaim is €595 up to a maximum of €4,050.

To qualify, only a property that you own and are living in can benefit from the VAT clawback. You cannot benefit if you are renting the property as a tenant or leasing it out as a landlord. If you are renovating a home that you intend to move into, then this home does qualify for the scheme, even though you are living elsewhere temporarily.

You must be paying income tax as a PAYE worker or as a self-employed person with up-to-date self-assessed tax returns. You can also claim if you are a pensioner with an occupational pension scheme and are paying tax under PAYE, but not if your sole income is the state pension.

In terms of the type of extension or renovation work that qualifies, it generally includes anything that incurs VAT at 13.5pc: this includes extensions; demolition; the supply and installation of kitchens and bathrooms; storage; attic conversions; plastering; painting; joinery and carpentry decorating; tiling; flooring; landscaping, which includes decking and structural work; home-office installation; new windows; addition of energy-saving measures like spray-on external insulation; heat-recycling systems; boiler installation and upgrade and solar panels.

The work that won’t qualify includes basically anything which invokes a 23pc VAT rate. This includes the cost of ‘non-tradesmen’ consultants, such as architects, engineers and chartered surveyors.

It is also worth bearing in mind that many types of household renovation work qualify for grants, most notably those from the Sustainable Energy Authority of Ireland (SEAI) for energyefficiency improvements.

But if you receive a grant, this will affect the amount you can claim in tax relief. Any qualifying expenditure will be reduced by three times the amount you receive as a grant. So if you paid €10,000 (including VAT) for external wall insulation and got €2,700 under an SEAI grant, you’ll only be able to claim back the VAT portion on €1,900 (€2,700 x 3 = €8,100; €10,000 – €8,100 = €1,900) rather than the €10,000 cost of the insulation job, which will amount to €226. You should check with the Revenue Commissioners for guidelines on this.