diff --git a/cookiecutter/main.py b/cookiecutter/main.py
index 047d30a08..bf1e82369 100644
--- a/cookiecutter/main.py
+++ b/cookiecutter/main.py
@@ -4,8 +4,10 @@
 The code in this module is also a good example of how to use Cookiecutter as a
 library rather than a script.
 """
+from copy import copy
 import logging
 import os
+import sys
 
 from cookiecutter.config import get_user_config
 from cookiecutter.exceptions import InvalidModeException
@@ -72,15 +74,17 @@ def cookiecutter(
         password=password,
         directory=directory,
     )
+    import_patch = _patch_import_path_for_repo(repo_dir)
 
     template_name = os.path.basename(os.path.abspath(repo_dir))
 
     if replay:
-        if isinstance(replay, bool):
-            context = load(config_dict['replay_dir'], template_name)
-        else:
-            path, template_name = os.path.split(os.path.splitext(replay)[0])
-            context = load(path, template_name)
+        with import_patch:
+            if isinstance(replay, bool):
+                context = load(config_dict['replay_dir'], template_name)
+            else:
+                path, template_name = os.path.split(os.path.splitext(replay)[0])
+                context = load(path, template_name)
     else:
         context_file = os.path.join(repo_dir, 'cookiecutter.json')
         logger.debug('context_file is %s', context_file)
@@ -93,7 +97,8 @@ def cookiecutter(
 
         # prompt the user to manually configure at the command line.
         # except when 'no-input' flag is set
-        context['cookiecutter'] = prompt_for_config(context, no_input)
+        with import_patch:
+            context['cookiecutter'] = prompt_for_config(context, no_input)
 
         # include template dir or url in the context dict
         context['cookiecutter']['_template'] = template
@@ -104,17 +109,31 @@ def cookiecutter(
         dump(config_dict['replay_dir'], template_name, context)
 
     # Create project from local context and project template.
-    result = generate_files(
-        repo_dir=repo_dir,
-        context=context,
-        overwrite_if_exists=overwrite_if_exists,
-        skip_if_file_exists=skip_if_file_exists,
-        output_dir=output_dir,
-        accept_hooks=accept_hooks,
-    )
+    with import_patch:
+        result = generate_files(
+            repo_dir=repo_dir,
+            context=context,
+            overwrite_if_exists=overwrite_if_exists,
+            skip_if_file_exists=skip_if_file_exists,
+            output_dir=output_dir,
+            accept_hooks=accept_hooks,
+        )
 
     # Cleanup (if required)
     if cleanup:
         rmtree(repo_dir)
 
     return result
+
+
+class _patch_import_path_for_repo:
+    def __init__(self, repo_dir):
+        self._repo_dir = repo_dir
+        self._path = None
+
+    def __enter__(self):
+        self._path = copy(sys.path)
+        sys.path.append(self._repo_dir)
+
+    def __exit__(self, type, value, traceback):
+        sys.path = self._path
diff --git a/cookiecutter/utils.py b/cookiecutter/utils.py
index 5935a249c..a13236a98 100644
--- a/cookiecutter/utils.py
+++ b/cookiecutter/utils.py
@@ -8,6 +8,7 @@
 import sys
 
 from cookiecutter.prompt import read_user_yes_no
+from jinja2.ext import Extension
 
 logger = logging.getLogger(__name__)
 
@@ -105,3 +106,15 @@ def prompt_and_delete(path, no_input=False):
             return False
 
         sys.exit()
+
+
+def simple_filter(filter_function):
+    """Decorate a function to wrap it in a simplified jinja2 extension."""
+
+    class SimpleFilterExtension(Extension):
+        def __init__(self, environment):
+            super(SimpleFilterExtension, self).__init__(environment)
+            environment.filters[filter_function.__name__] = filter_function
+
+    SimpleFilterExtension.__name__ = filter_function.__name__
+    return SimpleFilterExtension
diff --git a/docs/advanced/index.rst b/docs/advanced/index.rst
index 90e7f2933..66d5faadd 100644
--- a/docs/advanced/index.rst
+++ b/docs/advanced/index.rst
@@ -23,3 +23,4 @@ Various advanced topics regarding cookiecutter usage.
    template_extensions
    directories
    new_line_characters
+   local_extensions
diff --git a/docs/advanced/local_extensions.rst b/docs/advanced/local_extensions.rst
new file mode 100644
index 000000000..bf87caf7b
--- /dev/null
+++ b/docs/advanced/local_extensions.rst
@@ -0,0 +1,60 @@
+.. _`template extensions`:
+
+Local Extensions
+----------------
+
+*New in Cookiecutter X.x*
+
+A template may extend the Cookiecutter environment with local extensions.
+These can be part of the template itself, providing it with more sophisticated custom tags and filters.
+
+To do so, a template author must specify the required extensions in ``cookiecutter.json`` as follows:
+
+.. code-block:: json
+
+    {
+        "project_slug": "Foobar",
+        "year": "{% now 'utc', '%Y' %}",
+        "_extensions": ["local_extensions.FoobarExtension"]
+    }
+
+This example assumes that a ``local_extensions`` folder (python module) exists in the template root.
+It will contain a ``main.py`` file, containing the following (for instance):
+
+.. code-block:: python
+
+    # -*- coding: utf-8 -*-
+
+    from jinja2.ext import Extension
+
+
+    class FoobarExtension(Extension):
+        def __init__(self, environment):
+            super(FoobarExtension, self).__init__(environment)
+            environment.filters['foobar'] = lambda v: v * 2
+
+This will register the ``foobar`` filter for the template.
+
+For many cases, this will be unneccessarily complicated. It's likely that we'd only want to register a single function
+as a filter. For this, we can use the ``simple_filter`` decorator:
+
+.. code-block:: json
+
+    {
+        "project_slug": "Foobar",
+        "year": "{% now 'utc', '%Y' %}",
+        "_extensions": ["local_extensions.simplefilterextension"]
+    }
+
+.. code-block:: python
+
+    # -*- coding: utf-8 -*-
+
+    from cookiecutter.utils import simple_filter
+
+
+    @simple_filter
+    def simplefilterextension(v):
+        return v * 2
+
+This snippet will achieve the exact same result as the previous one.
diff --git a/tests/test-extensions/local_extension/cookiecutter.json b/tests/test-extensions/local_extension/cookiecutter.json
new file mode 100644
index 000000000..8141fd508
--- /dev/null
+++ b/tests/test-extensions/local_extension/cookiecutter.json
@@ -0,0 +1,10 @@
+{
+    "project_slug": "Foobar",
+    "test_value_class_based": "{{cookiecutter.project_slug | foobar}}",
+    "test_value_function_based": "{{cookiecutter.project_slug | simplefilterextension}}",
+    "_extensions": [
+        "local_extensions.simplefilterextension",
+        "local_extensions.FoobarExtension"
+    ]
+}
+
diff --git a/tests/test-extensions/local_extension/local_extensions/__init__.py b/tests/test-extensions/local_extension/local_extensions/__init__.py
new file mode 100644
index 000000000..94e854abd
--- /dev/null
+++ b/tests/test-extensions/local_extension/local_extensions/__init__.py
@@ -0,0 +1 @@
+from .main import FoobarExtension, simplefilterextension  # noqa
diff --git a/tests/test-extensions/local_extension/local_extensions/main.py b/tests/test-extensions/local_extension/local_extensions/main.py
new file mode 100644
index 000000000..53f6f8f95
--- /dev/null
+++ b/tests/test-extensions/local_extension/local_extensions/main.py
@@ -0,0 +1,21 @@
+# -*- coding: utf-8 -*-
+
+"""Provides custom extension, exposing a ``foobar`` filter."""
+
+from jinja2.ext import Extension
+from cookiecutter.utils import simple_filter
+
+
+class FoobarExtension(Extension):
+    """Simple jinja2 extension for cookiecutter test purposes."""
+
+    def __init__(self, environment):
+        """Foobar Extension Constructor."""
+        super(FoobarExtension, self).__init__(environment)
+        environment.filters['foobar'] = lambda v: v * 2
+
+
+@simple_filter
+def simplefilterextension(v):
+    """Provide a simple function-based filter extension."""
+    return v.upper()
diff --git a/tests/test-extensions/local_extension/{{cookiecutter.project_slug}}/HISTORY.rst b/tests/test-extensions/local_extension/{{cookiecutter.project_slug}}/HISTORY.rst
new file mode 100644
index 000000000..8bb7c6136
--- /dev/null
+++ b/tests/test-extensions/local_extension/{{cookiecutter.project_slug}}/HISTORY.rst
@@ -0,0 +1,8 @@
+History
+-------
+
+0.1.0
+-----
+
+First release of {{cookiecutter.test_value_class_based}} on PyPI.
+{{cookiecutter.test_value_function_based}}
diff --git a/tests/test_cli.py b/tests/test_cli.py
index a2d8accee..705ce1e64 100644
--- a/tests/test_cli.py
+++ b/tests/test_cli.py
@@ -9,6 +9,8 @@
 
 from cookiecutter import utils
 from cookiecutter.__main__ import main
+from cookiecutter.environment import StrictEnvironment
+from cookiecutter.exceptions import UnknownExtension
 from cookiecutter.main import cookiecutter
 
 
@@ -414,6 +416,35 @@ def test_echo_unknown_extension_error(tmpdir, cli_runner):
     assert 'Unable to load extension: ' in result.output
 
 
+def test_local_extension(tmpdir, cli_runner):
+    """Test to verify correct work of extension, included in template."""
+    output_dir = str(tmpdir.mkdir('output'))
+    template_path = 'tests/test-extensions/local_extension/'
+
+    result = cli_runner(
+        '--no-input',
+        '--default-config',
+        '--output-dir',
+        output_dir,
+        template_path,
+    )
+    assert result.exit_code == 0
+    with open(os.path.join(output_dir, 'Foobar', 'HISTORY.rst')) as f:
+        data = f.read()
+        assert 'FoobarFoobar' in data
+        assert 'FOOBAR' in data
+
+
+def test_local_extension_not_available(tmpdir, cli_runner):
+    """Test handling of included but unavailable local extension."""
+    context = {'cookiecutter': {'_extensions': ['foobar']}}
+
+    with pytest.raises(UnknownExtension) as err:
+        StrictEnvironment(context=context, keep_trailing_newline=True)
+
+    assert 'Unable to load extension: ' in str(err.value)
+
+
 @pytest.mark.usefixtures('remove_fake_project_dir')
 def test_cli_extra_context(cli_runner):
     """Cli invocation replace content if called with replacement pairs."""