How to borrow more on your mortgage when you’re in a fixed rate
Across the UK many homeowners find themselves wanting to take additional borrowing on their mortgage for purposes such as home improvement, debt consolidation or gifting money to relatives to get on the property ladder.
If you are considering doing the same but are tied-in to a fixed rate mortgage product, we’ll explain what your potential options could be to avoid having to pay an early repayment charge.
Take additional borrowing with your current lender
This is known as a further advance and when you approach your lender there are a few considerations you will need to be aware of:
- What is the reason for the additional borrowing? The majority of lenders will be happy with further borrowing for the likes of home improvements, however many lenders won’t lend if you are raising funds for business purposes. investment purposes, or to pay gambling debts.
- Does your affordability meet the lenders requirements? Every lender will want to do an affordability assessment to ensure that you can afford both your current mortgage and the additional borrowing based on your current financial situation.
- Do you have enough equity currently in the property? Although you may have got your original mortgage based on a 95% loan to value, when you want to take additional borrowing some lenders may cap this at a lower loan to value such as 85%.
Second charge (Secured Loan)
If your existing lender won’t allow you to take additional borrowing, or its not the best option then you may be able to take a second charge.
A second charge is where you have a second mortgage secured against your property by a different lender. When taking a second charge they will factor in the same aspects as a further advance such as the reason for the loan & assess your affordability.
However because the additional borrowing is to be secured against your property by a second lender they will need to get permission from the main lender that they are happy for this to be in place.
A second charge lenders will usually charge a higher interest rate than your current lender. The reason for this is because if your property had to be repossessed and sold then the first lender would be entitled to get their funds back first followed by the second charge lender. The risk is that if your property were to be repossessed and sold at a loss then the second charge might not get all of the funds back which they originally gave you.
Pay an early repayment charge to your current lender and go to a new lender
If it does not make financial sense to take a further advance, second charge or unable to get one of these options then you may need to pay an early repayment charge (ERC) to switch to a new lender to get the additional borrowing. If you can get a better rate whilst doing this then you might even make the cost of the ERC back, but if you’re already on a good deal this could be costly.
It’s important to speak with a qualified Mortgage Adviser who will be able to work out what the overall costs would be as they will be able to compare against what your current rate is and what your new rate will be whilst also factoring in any early repayment charges.
Other considerations?
If you’re considering doing home improvements then it would be beneficial to get some initial quotes from builders/tradesmen to understand what the overcall costs will be. Depending on the amount and type of work which is required some lenders may want to see these quotes.
If the property requires structural home improvements then you may need to get planning permission. Therefore its recommend that your speak with your local authority or an architect to get advice on this.
If you are doing debt consolidation then it would be beneficial to get your latest credit card statement or loan statement which confirms how much your overall debt is and what interest rate you are being charged.
Conclusion
Exploring additional borrowing options while on a fixed-rate mortgage requires careful consideration. Whether it’s a further advance, a second charge mortgage, or switching lenders, the right choice depends on your specific circumstances and financial goals. Seeking advice from a qualified Mortgage Adviser is essential to make an informed decision. Additionally, don’t forget to plan for the extra costs associated with your purpose, whether it’s home improvements or debt consolidation.
If this has got you thinking, we’d be delighted to help. Get in touch and we’ll be help you understand what’s possible, or sign up to our monthly newsletter, to keep your finger on the pulse.
William Sproule – 2nd November 2023
