If you need additional financing – for home renovations or other major expenses – remortgage may not always be the best solution. Paul Zammit suggests another funding route that might work
If you need to raise cash – perhaps to cover the costs of home renovations or to consolidate your existing debts – it may be a good idea to tap into the value of your property.
Ordinarily, your first port of call might be a regular mortgage. You simply go to a lender and seek to borrow a larger amount than your current mortgage. You can use the extra money raised for renovations, to reorganize your debts, or to finance a major purchase such as a wedding or to buy another property.
There can be downsides to this, however, which have only become more significant given the recent turmoil in the mortgage market.
Additional Financing: Why a Mortgage Isn’t Always the Solution
First of all, if you are still within the original fixed or variable term of your mortgage, remortgaging it may mean having to pay prepayment charges (ERC).
These are calculated as a percentage of outstanding debt and can therefore easily amount to thousands of pounds, which you will need to pay upfront.
Then there will be increases in monthly repayments – the extra borrowing will go a long way, but changes in the interest rate could drive up the cost further.
Over the past few weeks, we have seen a significant increase in the typical interest rates offered on regular mortgage transactions.
In the fallout from the government’s ‘mini-budget’, the average rate on a two-year fixed rate rose from 4.74% to over 6% in a matter of days, with similar jumps seen on five-year transactions.
By re-mortgaging, you will forgo your current rate, which was probably arranged when the offers on offer were much more attractive. In its place, you will sign up at a much higher rate.
Therefore, in order to raise the necessary funds, you will potentially have to pay significant exit fees and then switch to a much more expensive mortgage deal. It’s not an attractive prospect.
The alternative to the secured loan
Another option may be a secured loan. Secured loans – or second charge mortgages, as they are also called, allow you to tap into the value of your property, without affecting your existing mortgage contract.
The loan is secured by the equity you hold in the property. You can calculate how much equity you have by subtracting the amount of your current mortgage (called a first mortgage) from the value of your property.
The secured loan works much the same as a traditional mortgage, where you make monthly payments over a fixed term.
It’s on top of your existing first mortgage, meaning you can continue to make the most of that lower interest rate, while avoiding the painful cost of exit fees.
On the one hand, this additional loan will result each month in an additional expense for which you will have to account. However, with a quality broker, secured loans can be compared to regular mortgage offers, which means you are in the best position to make the right decision based on your situation.
Shareholdings on the rise
It’s also worth pointing out that many owners may have more equity than just a few years ago.
This is because since the pandemic we have seen incredible growth in the value of our homes. According to the latest data from the Office for National Statistics, in the year to July real estate prices jumped 15.5%, the highest rate for almost 20 years, the equivalent of around £39,000 in cash.
This increase in equity will provide households with the opportunity to raise larger sums for their home improvement or debt consolidation goals.
These are just two examples of why some homeowners turn to secured loans – in other cases they may be looking to raise cash to pay a tax bill or to use as a deposit when buying a home. a second property.
Find the right financing
Not all mortgage brokers handle secured loan files, so it’s important to work with a specialist. With a specialist broker, secured loans are handled daily, meaning they can help clients of all kinds identify the right lender and loan for their situation.
Paul Zammit is rdirector of regulated real estate loans at The Lending Engine