Bank on your home

You're outgrowing your house. Either you need a bigger kitchen just so you can buy a proper kitchen table, or you're planning to work from home and you want a study, or the children are morphing into teenagers and you want them to have their own space where they can turn up the volume without you having to suffer.

But before you put yourself on the mailing list of every estate agent in the vicinity and stick up a for sale sign, consider the costs and balance the scales of whether you should move or extend.

Selling a property worth £500,000 (not unreasonable for a family home in many parts of London) will cost £10,000 for the estate agent's commission, assuming a rate of two per cent of the property's value. Buying a larger property for, say, £550,000, will cost you £22,000 in stamp duty at a rate of four per cent (the rate payable on properties worth more than £500,000). So that's £32,000 spoken for, before you even start working out the cost of solicitors, surveyors, searches and land-registry fees and factoring in months of stress while you move. That is, of course, if you can find somewhere you want to move to that isn't overpriced. The supply of properties has improved slightly over the past couple of months as sellers decide they won't do much better by waiting and landlords divest themselves of buy-to-let investments which are not making money. However, there's still fierce competition for good property and no guarantee that you'll find something better than you have already.

Not surprisingly, many people are opting to stay put and use their money to extend their existing home rather than writing out large cheques to estate agents, solicitors and the Chancellor of the Exchequer. "I'm often asked to value a property as it is, make a guess at the cost of a conservatory or a loft extension and say whether it's worth doing," says Chris Underhill of estate agent Prickett and Ellis Underhill in Highgate. "In most cases, I say it will be cost effective." On a £600,000 property, you can spend £35,000 on an extension or a loft and, in the current market, expect to get your money back plus roughly £10,000 if you sell in the next few years, says Underhill.

Extended houses sell well, especially if it's the ground floor that's being extended. Properties with large groundfloor living spaces are highly sought-after in areas such as Highgate, where most of the houses are laid out over three or more storeys.

Thanks to years of rising prices, many Londoners are sitting on tens or even hundreds of thousands of pounds of equity in their homes and lenders are doing a roaring trade in remortgages. "We're seeing more people remortgage to fund home improvements," says Alison Cooley at independent mortgage adviser Charcol. "People are taking the view that they've got a good amount of equity in their properties." Lenders are competing with each other to offer cheap rates and pay borrowers' valuation and legal costs. The best deals are on offer to borrowers wanting to borrow less than 75 per cent of their property's value. If you can stand the upheaval of having the builders in, investing funds in extending your home can make good financial sense, says Mark Bolland of independent financial advisers Chamberlain de Broe. "Normally, an extension will add value. And property's a good place to put your money at the moment." The average price of property in London rose by 16 per cent year on year in the first quarter of this year, making property appear a more tempting investment than putting your money into a volatile stock market or a savings account paying microscopic amounts of interest.

There are also tax advantages to putting money into your existing property. Assuming your home is your main residence, you won't be liable for capital gains tax on any profits when you sell. By contrast, CGT is payable on profits from other investments such as shares or second homes. "I've had a number of clients facing big bills from selling second homes," says Bolland.

But before you empty your savings accounts and pour money into your home, make sure you have enough cash and easily accessible investments, says Anna Bowes of independent financial adviser Chase de Vere. "You need a balanced portfolio. It's important that you have access to cash; money tied up in property isn't liquid."

Bowes continues that you will avoid CGT on profits from selling extended properties, but she stresses that avoiding tax shouldn't be your primary motivation. Every individual has a CGT allowance of £7,700, which means couples can make profits of £15,400 before becoming liable for tax. After this there are rules that allow you to cut your tax bills by carrying forward losses and using higher relief on longer-term investments.