Taking a Further Advance on Your Mortgage for Home Renovations: A Comprehensive Guide
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Home renovations can add significant value to your property and improve your quality of life; but financing them can be a major concern. One option to consider is a further advance on your mortgage. This can be an attractive alternative to personal loans, as it typically allows you to tap into your home’s equity at a comparatively lower-interest rate. In this guide, we’ll explore the benefits, potential drawbacks, and key considerations when taking a further advance to fund home renovations.
What is a Further Advance?
A further advance is essentially an additional loan you take on top of your existing mortgage, using your home as security. This option is generally available if:
• You have built up sufficient equity in your property.
• You meet the lender’s affordability and credit checks.
A further advance does not mean remortgaging, as you’re not switching lenders or changing the terms of your primary mortgage. Instead, you’re borrowing more from your current lender, often with a separate rate and terms for the new loan amount.
Advantages of Taking a Further Advance for Renovations
Potentially Lower Interest Rates: Further advances usually offer interest rates much lower than those of unsecured loans or credit cards, as they’re secured against your property. This can be a significant cost saver if you’re looking to borrow a substantial amount for renovations.
No Need to Change Lenders: Staying with your current lender can minimise costs associated with switching, such as legal fees and property valuations. By opting for a further advance instead of remortgaging, you could save money on additional fees, retain any favourable terms of your current mortgage and negate any early repayment charges that may be payable, and avoid the administrative hassle of moving lenders.
Adding Value to Your Property: Strategic renovations can increase the value of your home, potentially recouping the cost of the further advance when it comes time to sell. Kitchens, bathrooms, and other high-return renovations often yield a higher sale price, which can be advantageous in the long term.
Manageable Monthly Payments: Most further advances are structured to fit within your existing mortgage payment plan, so you can spread the cost of your renovation over an extended period, keeping your monthly payments manageable.
Disadvantages of Taking a Further Advance
Increased Overall Debt: A further advance means increasing the amount you owe on your home, which can lengthen your mortgage term and increase the total interest paid over the life of the loan. This added debt can impact your financial flexibility, making it essential to carefully consider whether the renovations justify the additional borrowing.
Risk of Losing Equity if Property Value Decreases: A further advance leverages your home equity, reducing the buffer between your debt and your home’s value. If property values drop, you could face a situation where your home’s value no longer covers your outstanding mortgage, putting you at risk of negative equity.
Potential Fees and Affordability Checks: While a further advance usually incurs fewer fees than remortgaging, some lenders may still charge arrangement fees or require a valuation. Additionally, you will need to pass affordability and credit checks, even if you’re staying with your current lender. These checks ensure that you can manage the additional debt, but they may limit your borrowing capacity if your income has changed or your credit score has weakened.
Impact on Future Borrowing: An increased mortgage balance may affect your future borrowing power. Lenders will assess your total outstanding debt when evaluating applications for additional borrowing, such as car loans or other mortgages. A further advance could therefore limit your financial flexibility in the future.
Key Considerations Before Taking a Further Advance
Evaluate Your Renovation Plans: Not all renovations yield a high return on investment, so it’s essential to assess which upgrades will add the most value to your home. Kitchens, bathrooms, and energy-efficient improvements are popular for their potential to enhance both quality of life and property value. However, personal projects, like a luxury entertainment room, might not have the same appeal to future buyers
Assess Your Loan-to-Value (LTV) Ratio: Most lenders require that your combined mortgage and further advance do not exceed a certain percentage of your property’s current value, known as the loan-to-value (LTV) ratio, so it’s advisable to have your property value appraised to get a clear picture of your equity. Sometimes borrowing even £1.00 in excess of a LTV limit, can mean a higher interest rate across your entire further advance
Consider Your Financial Stability: While manageable monthly payments make further advances attractive, it’s vital to ensure you can comfortably afford the extra debt. Consider how the added expense will impact your budget, especially if your income or financial circumstances change in the future.
Investigate Alternative Financing Options: A further advance is not the only way to finance home renovations. Remortgaging to a lender with a better rate or secured loans are other options that might be more beneficial depending on your circumstances. Personal loans, while usually offering higher interest rates, could be suitable for smaller projects that don’t justify a further advance, however some kitchen loan may be provided a 0% finance but typically with a shorter repayment profile.
Review your financial protection arrangements: A further advance will increase the amount owed against your home and potentially your mortgage term and monthly repayments, you should seek professional advice on how this may impact your financial protection needs for life cover or income protection for instance
Navigating the nuances of a further advance requires an understanding of how it will impact your financial position and long-term goals. Speaking with a financial adviser can help you assess whether it’s the right option, explore alternatives, and understand any implications for your tax situation or other financial obligations.
Conclusion
Taking a further advance on your mortgage can be an efficient and cost-effective way to fund home renovations, especially if you have a favourable rate with your current lender and wish to avoid the fees associated with remortgaging. However, it’s essential to weigh the pros and cons carefully. While a further advance can help you achieve your dream home, it increases your debt and may impact your financial flexibility.
By considering your renovation’s potential value, your current equity, and how the added debt fits into your long-term financial plan, you can make an informed decision about whether a further advance is the right solution. As with any significant financial decision, seeking personalised advice from a qualified adviser can help maximise the benefits and minimise any risks associated with your home renovation financing.