Our easy guide to equity, LTV and loan sizes for second charges
Although the Finance and Leasing Association member’s figures (June 2017) published that the average second charge loan is £48,000 many people borrow amounts in excess of £100,000. At the upper end the maximum published loan size is £2.5 million and several lenders are prepared to consider higher amounts upon referral.
The most common reasons for second charge borrowing are for home improvements or extensions, to purchase an overseas home, pay a tax bill or to fund the expansion of a business. It’s not limited to these reasons and most legal purposes are acceptable to our lenders.
Ultimately the maximum amount that you can borrow will come down the equity (LTV) in your property, your personal credit rating and most importantly your ability to service the proposed loan.
How do I calculate how much equity I have in my property?
Firstly, LTV stands for Loan To Value and it is used to calculate equity. If a lender states that their maximum LTV is 75% then it means that the maximum amount that you could borrow would be 75% of the value of your property, less the outstanding mortgage balance.
It might be easier to show a working example - so if your property is worth £500,000 and you have a mortgage of £250,000 and the lender agrees to lend to 75% LTV, then the maximum loan size they would consider would be £125,000. (Value of £500,000 x 75% = £375,000 less mortgage of £250,000 leaves a potential maximum loan of £125,000)
What is credit scoring and how does it affect me?
A number of the lenders on our panel take into account the credit score of an applicant given from a credit reference agency such as Equifax or Experian. Your credit score takes into account the conduct of any current or previous credit and things such as missed payments would generally have a negative effect and reduce your score. Basically, the higher your credit score the lower the interest rate offered.
Can I afford it?
Out of all of the assessments the most important one by far is affordability. It is in everyone’s interest that you are able to service the loan, not just now but throughout the whole duration of the loan.
In order to determine if you can afford the loan lenders build in a stress test to see if you could still afford the loan if your mortgage were to increase or interest rates on a mortgage to fluctuate. They will only lend where they believe that you could continue to afford the loan should the rates rise by 3%.