Borrow More on Your Mortgage
If you want to raise finance for whatever reason, one option is to approach your current mortgage lender for a further advance.
Your mortgage lender will already have a track record of your payment history, and if they believe you can afford to borrow extra funds, they are likely to agree to further borrowing.
How To Borrow More On Your Mortgage
To obtain more money from your current mortgage provider, they would conduct an income and expenditure analysis to ensure you can afford the proposed further borrowing.
It's essential that you can afford the higher monthly payments because if you cannot maintain them, you could lose your home.
Rather than just approaching your current lender for additional funds, it is a good idea to speak to a CeMAP (Certificate in Mortgage Advice and Practice) qualified mortgage broker to ensure that borrowing from your current lender is the best way of raising funds.
A mortgage broker would typically consider additional options, including:
A remortgage - this is where you apply for a new mortgage with a different lender. This might be appropriate if you don't have any early repayment charges on your current mortgage and the interest rate with the new lender is less than you are paying on your existing mortgage deal.
Second charge mortgage - a mortgage broker may recommend a second mortgage, also known as a second charge mortgage, especially if your current mortgage is subject to early redemption charges.
A second charge mortgage may also be a consideration for someone with adverse credit registered against them since they took out their current mortgage. It might make sense to keep the existing mortgage, which will likely have a lower interest rate, rather than remortgage at a higher interest rate. Remember that with a second mortgage, you are offering your home as security to the lender, meaning you may lose your home if you miss repayments.
An unsecured or personal loan. This type of loan is generally for smaller loans, typically £1,000 - £15,000. To qualify for an unsecured loan, you need a good credit history. You can approach a credit reference agency to get a copy of your credit report without affecting your credit score.
What Are The Options For Renovation Loans?
If you want to borrow a significant amount, say £50,000, to carry out a loft conversion or home renovations, the options would be a further advance with your current lender, a remortgage or a second charge mortgage.
If you require a small loan of, say, £5,000 to replace a couple of windows, you may qualify for a personal loan. The benefit of this type of loan is that it is not secured against your home.
Budgeting carefully when taking out a loan for home renovations is essential. If the works being carried out are extensive, it would be worth securing the services of a surveyor and reputable builder who could give you an accurate idea of the costs of the work.
If you apply for a loan and it's approved, it's often difficult to go back to that lender a few months later to say you need another £7,500 to finish the renovation works. Most lenders want to see you make at least the first six repayments before lending you further funds.
Regardless of which type of loan you take out, all lenders will carry out credit checks, which may determine the amount you can borrow and at what interest rate.
Ultimately, you need to feel confident that you can make the repayments not only now but for the entire term of the loan, as most of the options available to you involve offering your home as security to the lender.
Second Mortgage For Renovation Works
The first criterion for someone taking out a second mortgage or second-charge loan is that they already have a mortgage secured against their property.
A lender will want to know the extent of any work to be carried out to your home (or the property provided as security). For example, suppose the applicants must live in rented accommodation for three months while home renovations occur. In that case, the lender must consider the rental payment when assessing whether the applicants can afford the loan.
Lenders will look at three main points:
- The equity in an applicant's home.
The equity is the difference between the value of a property and any mortgages secured against the property. Therefore, if some had a property worth £500,000 and an outstanding mortgage of £300,000, the equity would be £200,000. Most lenders lend up to 75% of the loan to value or LTV, meaning in this scenario that the applicant could potentially borrow £75,000 (value of home £500,000 x 75% = £375,000, minus mortgage of £300,000 which leaves £75,000). There are other lenders which will lend over 75% LTV. The loans offered over 75% generally attract a higher interest rate, and the loan sizes are often lower.
- The applicant's credit rating.
All lenders will carry out a credit search to assess your creditworthiness. If you have had some county court judgments (CCJs) recently registered against you, you are likely to find it challenging to get a loan. If you can obtain a loan, the amount you can borrow will be restricted, and the interest rate will likely be very high. In this scenario, you should think seriously about taking on extra borrowing, remembering you may lose your home.
The better your credit score, the more you can borrow at a competitive interest rate.
- Affordability. All lenders will assess income versus outgoings to ensure you meet the proposed monthly repayments.
As a borrower, you need to be comfortable meeting the proposed monthly repayments, as missing repayments could ultimately result in losing your home. Part of the process of obtaining a second mortgage is to provide proof of your income. For an employed applicant, you would have to supply the last three wage slips or your latest P60 (sometimes both). Lenders differ in terms of how much overtime and bonuses they will include when assessing affordability.
Self-employed applicants would be expected to provide recent accounts, SA302s, or get a certificate from a suitably qualified accountant confirming their income over the last three years.
Once a lender has completed all their checks and is happy with your application, they will make you an offer to lend you the money. This mortgage offer is normally valid for three to six months. If you've not signed the mortgage offer within six months, the lender may want to reconsider your application and ask for more recent proof of income to ensure you are still employed and your income hasn't decreased.
Upon receiving the signed mortgage offer, the lender will formally complete your application and transfer the funds to your bank account.
You can start your renovation project as soon as the funds have landed, although it would make sense to keep the money in a separate account to avoid the temptation of using the funds to buy something else, say a holiday!
For more advice about borrowing more on your mortgage or secured loans, contact The Second Mortgage Company today.