Borrowing additional funds

Borrowing against your home can help fund important plans, but it also increases the amount secured on the property.

Before proceeding, it is important to understand why the funds are needed, whether borrowing is appropriate, the alternatives available, and the effect on monthly payments and total cost.

At a glance

Understanding equity and loan-to-value

Equity is broadly the difference between the property's current value and the borrowing secured against it.

For example, if a property is valued at £300,000 and the existing mortgage is £180,000, the apparent equity is £120,000. This does not mean that £120,000 can be borrowed. The lender will decide which property value it accepts, the maximum loan-to-value it permits, and how much is affordable.

Loan-to-value, usually shortened to LTV, expresses secured borrowing as a percentage of the property value accepted by the lender. Where more than one loan is secured on the property, the lender may consider the combined loan-to-value, which reflects the total secured borrowing.

The three main routes

Further advance

A further advance is additional borrowing from your existing mortgage lender, usually secured against the same property and held alongside the main mortgage.

The further advance may have a different interest rate, product period, repayment basis and end date from the main mortgage.

Remortgage with additional borrowing

This route replaces the existing mortgage with a larger mortgage, usually from a different lender. Part of the new borrowing repays the current mortgage and the balance provides the additional funds.

Second charge mortgage

A second charge mortgage is a separate loan secured on the property in addition to the existing first mortgage. The first mortgage remains in place, and the second lender ranks behind the first lender in repayment priority.

Comparing the routes

How much could be available?

The amount available is not determined by equity alone. A lender may consider:

• The property value it accepts.
• Existing mortgage and secured-loan balances.
• Maximum permitted LTV or combined LTV.
• Income and how it is evidenced.
• Household expenditure and credit commitments.
• Credit history.
• Mortgage term and repayment method.
• Age and retirement plans.
• Purpose of the borrowing.
• Property type and condition.
• The lender's current criteria.

The lowest limit produced by these considerations may determine the amount offered. An initial calculator result is not a guarantee of lending.

Common reasons for borrowing more

Additional borrowing may be considered for:

• Home improvements, repairs or adaptations.
• An extension or renovation.
• Buying out another owner's interest, subject to legal advice.
• Supporting a property purchase or family member.
• Education costs or other significant expenditure.
• Purchasing another property.
• Business purposes where permitted.
• Debt consolidation where appropriate.

The lender will normally need to understand the purpose and may ask for supporting information or impose restrictions.

Debt consolidation needs particular care

Using mortgage borrowing to repay credit cards, personal loans or other debts may reduce the immediate monthly payment, but this does not necessarily reduce the overall cost.

Potential consequences include:

• Repaying short-term debt over a much longer period.
• Paying more interest overall.
• Turning unsecured borrowing into debt secured against the home.
• Incurring early repayment charges, fees or new product restrictions.
• Rebuilding unsecured balances after consolidation, resulting in more debt.

Alternatives should be considered before proceeding. Where debt repayments are already difficult, free independent debt advice may be more appropriate than taking further secured borrowing.

Affordability and financial resilience

A lender's assessment is an important safeguard, but the maximum available is not necessarily the right amount to borrow.

Consider:

• The comfortable monthly payment, not only the maximum permitted loan.
• Whether payments could increase.
• Changes to income, employment or household expenditure.
• Maternity, parental leave, retirement or reduced working hours.
• Emergency savings remaining after the transaction.
• How the borrowing affects future plans and financial flexibility.

Term and repayment method

A longer term can reduce the monthly payment but usually increases the total interest paid. A shorter term normally increases the payment but can reduce the overall interest cost.

Additional borrowing may not need to use the same term as the existing mortgage. Different end dates can be useful, but they can also make future restructuring more complicated.

Interest-only borrowing leaves the capital outstanding and requires an acceptable repayment strategy. Availability and criteria are lender-specific.

Costs and features to compare

Compare the overall cost and practical consequences, not only the headline rate or monthly payment.

Alternatives to borrowing against the home

Depending on the purpose and circumstances, alternatives may include:

• Using savings while retaining an appropriate emergency reserve.
• Delaying or reducing the planned expenditure.
• An unsecured personal loan or purchase finance.
• Selling other assets.
• A family arrangement supported by legal advice.
• Downsizing or selling the property.
• Free debt advice where the purpose is to manage financial difficulty.

An unsecured loan may carry a higher interest rate, but a shorter term and lower fees can sometimes produce a lower total cost. It does not place a legal charge over the home.

Later-life lending and equity release

Later-life borrowing can include standard mortgages extending into retirement, retirement interest-only mortgages and equity-release products such as lifetime mortgages.

A lifetime mortgage is a specialist form of borrowing secured against the home. Payment options vary. Any unpaid interest can be added to the loan, causing the balance to grow through compound interest. The arrangement can reduce the estate available to beneficiaries and affect means-tested benefits, tax circumstances and future choices.

The amount available depends on the provider's criteria and can reflect age, property value, health and product features. Equity release is a significant long-term decision requiring specialist regulated advice and consideration of alternatives.

Preparing for an additional borrowing review

Have the following information available:

• Current mortgage statement and balance.
• Current rate, payment, repayment method and remaining term.
• Product end date and early repayment charge.
• Estimated property value.
• Amount required and a clear breakdown of the purpose.
• Income and expenditure information.
• Details of all credit commitments.
• Expected changes to employment, family circumstances or retirement plans.
• Quotes or estimates for works where relevant.
• The preferred timescale.

Questions to ask before proceeding

• Why are the funds needed?
• Is borrowing the most suitable solution?
• What alternatives have been considered?
• What will the new monthly commitment be?
• What is the expected total cost?
• Am I replacing a competitive existing mortgage?
• Could the term extend into retirement?
• What happens if income falls or costs increase?
• Will sufficient emergency savings remain?
• Are there early repayment charges or restrictions?
• How will this affect plans to move or remortgage?
• If consolidating debt, how will new unsecured borrowing be avoided?

MMPE’s approach

Glossary

This guide is for informational purposes only and was accurate at the date of publication. Please seek personalised advice before making financial decisions.