Can we build an annexe on our property, sell it and use the proceeds to clear our interest-only mortgage?

Published: 03:08 EST, 20 September 2014 | Updated: 03:11 EST, 2 October 2014

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My husband and I have joint ownership of a semi-detached property which is on an interest-only mortgage.

The mortgage is £95,000 payable until 2021. The valuation of the property three years ago was £285,000.

Our children don't want us to sell the property because of happy memories. Can we build a granny annexe and sell this part for £95,000 to pay off our mortgage? T.W., via email.

Land grab: Is building an annexe a sensible way to clear a mortgage?

Adam Uren, of This is Money, replied: Past sales of interest-only mortgages, particularly in the 1990s, have left thousands of borrowers seeking different solutions to pay their debt when they come to the end of their terms.

In your case, you are proposing building an annexe on the property and then selling it off to cover what you owe on your mortgage. However, choosing this path could prove complex, expensive and filled with uncertainties.

Chartered financial planner Claire Walsh, of Pavilion Financial Services, says: ‘Building an annexe with the hope of selling it seems like a high-risk strategy.

‘How will you fund the building cost? What if it’s hard to sell? And how would an annexe affect the value of the main house? These are some of major questions you need to answer, plus you will have to bear in mind any annexe would be subject to building regulations.

‘I would recommend that you and your husband have a full review with a mortgage adviser to explore your options in respect of their mortgage – perhaps you could switch to a repayment plan, or consider equity release in due course, or if your children have money and can afford it, perhaps they would be willing to help?’

Concerning the practical aspects of building an annex, Danny Cox, head of advice at Hargreaves Lansdown, says: 'With the right planning permissions you can build an additional dwelling or split an existing building into separate dwellings.

‘You need to check whether there are any restrictions on increasing the footprint of your property. In some cases you won't be able to add more living space.

‘You also need to look closely at the cost of building, legal fees etc and then at what the annexe might sell for. Speak to experts and be sure there is some wiggle room in the project as these things notoriously cost more than first estimates. How will you pay for the building work? There may be some time before the annexe sells.

‘Before you start spending money on architects’ plans it would be worth speaking to the planning team at the local authority about the viability of the project as most annexes cannot be sold separately.

‘You also need to consider whether you want someone else living so close to you.

‘In the meantime you need a plan to repay your mortgage. If converting to a repayment mortgage will be too expensive, start saving separately or, if you have the option, overpay your mortgage. For example, An overpayment of £250 per month will reduce your mortgage to around £71,000 by 2021.'

When it comes to selling an annexe, there may be capital gains tax to pay. If the existing semi-detached property is no longer your main residence, any proceeds from its sale, including the annexe may be subject to CGT, - although relief is available if it has been lived in as a main residence relatively recently. Read more here.

Be sure to speak with an accountant to clarify before you proceed.