As house prices across parts of the UK hit an all-time high, and land for new builds becomes more and more scarce, existing homeowners are increasingly looking to home improvements and renovations rather than upping sticks. But how are they funding these changes? Rebekah Commane looks into the matter
Many take out personal loans but further advances, also known as second charges, can also be utilised if you have equity in your home. This works by extending the amount of credit you borrow on the property and usually means your mortgage will be paid back over a longer timeframe. Lenders offer varying percentages of the value of your home for further advance.
This type of loan can also be used to fund other requirements but what will qualify as warranting a further advance depends on each individual lender.
Ray Boulger, senior technical manager at John Charcoal, spoke to What Mortgage about when a further advance makes sense and when it’s best to look into other borrowing solutions.
Home improvements
“Further advances are generally used for home improvements and/or to consolidate debt,” Boulger advised.
“Before the credit crunch, lenders generally weren’t as bothered about why a customer wanted to take out a further advance, so long as they could afford their repayments.
“Now it can be harder to secure a further advance, although for home improvements it generally shouldn’t be a problem, especially if the customer has a good track record with a lender.
“Most lenders will have different rates depending on the loan-to-value (LTV) and the amount of equity available for release.
Personal loans
“Consumers should never jump into any financial decisions, including choosing to take out a further advance, without looking into all the options. A personal loan should also be considered as you may be able to get better rates, depending on the length of time you think you need to pay back the loan.”
An unsecured loan also means there is less risk of losing your home if you can’t meet the repayments but your repayments will generally be higher than for a further advance.
Boulger explained that five years is usually the maximum you can take out a personal loan for and the cheapest rate at the moment is with Hitachi Personal Loans, at 4.9 per cent.
“If you need more time to pay it off then a further advance can be the right choice. With a further advance there are also admin charges; it’s certainly worth exploring what’s best for your individual circumstances.”
Remortgage
Another option to release equity from your property is to remortgage, dependent on the deal you have. However, if you have a good, fixed rate deal there’s little point in seeking to remortgage as it’s unlikely you’ll find a better deal, Boulger recommends.
Zero per cent transfer
“In addition a 0 per cent balance transfer rate on a credit card could be a solution for a smaller loan. The fee you pay covers the loan period, so the best idea is to pay off the minimum amount for the duration of the interest free period and to instead save money to pay off the outstanding debt. This can be a good option for minor home improvements.
“So long as you are meeting your existing mortgage payments and can prove that the loan would be affordable, it shouldn’t be a problem to borrow.”
Environment
David Dodd, CEO of Darlington Building Society told What Mortgage that further advances were traditionally used for home improvements, such as double glazing, conservatories, etc.
“Nowadays they are more popularly used for energy saving and environmentally sound improvements to the home, like boilers or solar panels.
“Further advances will generally be given without issue to those on low LTV mortgages, up to 80 per cent.”
Trendy
He said that the popularity of further advances in the housing industry tends to be cyclical.
“They are generally taken out around bank holidays, when people consider carrying out home improvements. And further advances also come into demand when there is a dip in the housing market, when less people are moving home.”
He suggested that further advances aren’t suitable for those taking out very small loans, or to make a purchase with any risk attached, such as stocks and shares.
Second properties
Another reason why a further advance might be taken out is to raise a deposit for a second home.
“Equally some people have used a further loan to buy a second home outright.” Dodd added.
“For instance, imagine a couple who bought their home 20 years ago and have reduced their mortgage to £30,000. Their property might now be worth £300,000 and they want to purchase a holiday home in Portugal for £100,000.
“Rather than trying to get a mortgage in Euros in Portugal, they could take out a further loan on their main UK residence, which would still only be at 43 per cent LTV.
Caution
Consumers also often make requests for further advances in order to pay off a personal loan but Dodd says that it’s important to use caution in this sort of situation.
“We do need to be careful here. The advantage is that the customer will generally benefit from a lower rate of interest on the further advance – however, they are substituting an unsecured loan with a secured loan and they may need to be aware of the implications of this.
“In other words, if you default on a personal loan, the lender has no charge over your assets; whereas if you default on a secured loan, your home may be repossessed.”
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