If you need additional finance – for home improvements or other major outlays – remortgaging may not always be the best solution. Paul Zammit suggests another funding route which may be suitable
If you need to raise funds – perhaps to cover the costs of home improvements, or in order to consolidate your existing debts – then it can make sense to tap into the value of your property.
In ordinary times, your first port of call might be a regular remortgage. You simply go to a lender and look to borrow a larger amount than your current outstanding mortgage. You can use the additional money raised for refurbishment work, to rearrange your debts, or to finance a major purchase like a wedding or to purchase another property.
There can be downsides to this however, which have only become more significant given the recent mortgage market turmoil.
Additional finance: Why a remortgage is not always the answer
First and foremost, if you are still within the initial fixed or variable term of your mortgage, then remortgaging can mean having to pay early repayment charges (ERCs).
These are calculated as a percentage of the outstanding debt, and so can easily come to thousands of pounds, which you will have to pay upfront.
Then there will be increases in the monthly repayments – the additional borrowing will be a major contributor to this, but the changing interest rate could cause the cost to climb further.
In recent weeks, we have seen a significant rise in the typical rates of interest on offer on regular mortgage deals.
In the fallout from the government’s ‘mini-Budget’, the average rate on a two-year fixed rate rose from 4.74% to above 6% within a matter of days, with similar jumps seen on five-year deals.
By remortgaging, you will be giving up your current rate, which was likely arranged when the deals on offer were far more attractive. In its place you’ll be signing up to a much higher rate.
As a result, in order to raise the money needed, you’ll potentially have to pay a significant exit fee and then move to a much more costly mortgage deal. It’s not an appealing prospect.
The secured loan alternative
An alternative option may be a secured loan. Secured loans – or second charge mortgages as they are also known – allow you to tap into the value of your property, without impacting your existing mortgage deal.
The loan is secured against the equity you hold in the property. You can calculate the equity you have by subtracting the amount of your outstanding mortgage (known as your first charge mortgage) from the value of your property.
The secured loan works in much the same way as a traditional mortgage, where you make monthly payments over a set term.
It runs alongside your existing first charge mortgage, meaning you can continue to make the most of that lower interest rate, while also avoiding the punishing cost of an exit fee.
On the one hand this additional borrowing will mean a further outgoing each month for which you must account. However, with a quality broker, secured loans can be compared with regular remortgage deals, meaning you’re best placed to make the right decision for your circumstances.
Rising equity stakes
It’s also worth pointing out that many homeowners may have more equity at their disposal than would have been the case just a couple of years ago.
That’s 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 house prices jumped by 15.5%, the highest rate in almost 20 years, the equivalent of around £39,000 in cash terms.
This increase in equity will provide households with the potential to raise greater sums for their home improvement or debt consolidation aims.
These are just two examples of the reasons some homeowners turn to secured loans – in other cases, they may look to raise the funds in order to pay a tax bill or to use as a deposit when purchasing a second property.
Finding the right funding
Not all mortgage brokers handle secured loan cases, which is why it’s important to work with a specialist. With a specialist broker, secured loans are handled on a daily basis, which means they can help clients of all kinds identify the right lender and loan for their circumstances.
Paul Zammit is regulated mortgages director at The Loans Engine
