Financing home improvements – considering your options

Is it just me or is someone doing home improvements everywhere you look? I only have to stick my head out of the window and I can see three houses taking on major renovations, but why and how are people doing this when interest rates are higher than they’ve been for years? With the housing stock being low and people getting itchy feet, expanding your property can be a tempting proposition.

One way of doing this is asking for a further advance, but what exactly is a further advance? A further advance is additional borrowing from your existing lender. For example, if your current mortgage is on a fixed rate and you don’t want to pay early repayment fees to leave your lender but want to borrow more money, you could ask to borrow additional funds to support your home improvements. This would be subject to your current lender’s criteria, your credit scoring, how much you can borrow based on your income along with you having enough equity in your property. A further advance is linked to your property, so it’s important to ensure that you’ll be able to make repayments as otherwise your home could be at risk. If your existing mortgage term finishes before your further advance, this could also affect your flexibility in the future.

But what if you aren’t able to borrow more with your current mortgage provider?

Another option for you could be a second charge loan. A second charge loan is a loan secured against an asset, such as your home, as an additional mortgage with a new lender that sits on top of your pre-existing mortgage and takes second priority to the first. Your current mortgage is often referred to as a first charge on the property, hence an additional loan from another lender is referred to as a second charge. This means that if you have a good interest rate or are at the edge of your borrowing capacity with your current lender, you can look to borrow more funds with an additional lender without losing out on the benefits of your current mortgage. For example, if you have a mortgage with a low interest rate fixed for three more years, you may not want to move this mortgage and the additional borrowing requirement to another lender at a higher interest rate.

On a second charge there is no need to pay early repayment charges as it is a completely separate account to your existing mortgage. As with a further advance, however, it’s important to note that you will be borrowing against your home and therefore it carries the same risk of losing your property should you be unable to make the repayments at any time. You will also need permission from your existing mortgage lender to take out a second charge mortgage.

So why might you consider a second charge loan when you could take out a further advance? The main reasons you may do this over a further advance could be that your financial situation may have changed, you no longer meet your current lender’s credit scoring or your property may not be valued where you need it for the borrowing you are seeking.

A final important point to note is that although a second charge may sound more flexible, remaining with your current lender is usually a better option as they will frequently offer a more favourable rate of interest with lower fees than a second charge lender. If you’re a homeowner looking to do some home improvements, then we’d recommend speaking to a mortgage advisor so they can review your mortgage borrowing options on a first or second charge basis to see what best suits your needs. 

MS/DY/7070/10.23

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