Home Improvement Mortgage
Mortgages for home improvement
When we buy a property, we are either purchasing a home, or investment. Either way, it is important that the property is kept in good condition and in some cases home improvement is a sensible course of action.
Improving your home can of course be an expensive business. Costs can run into tens of thousands of pounds, or even more if there is extensive home improvement required. Buyers rarely have sufficient cash available for home improvement and as a result lending is often required.
Lending for home improvement – what to consider
If you are considering home improvement for a new property, financing that improvement should not be something that has not been considered beforehand. If you are buying a property with home improvement in mind, the cost of that improvement should be considered with the initial application.
Do you require a little extra lending to put some funds aside for future home improvement? Is there a way to obtain that lending with minimal additional cost? How extensive will your improvements be? Will the need for those improvements have an impact on the suitability of the property as security?
If you have owned your property for some time and are now considering improvements, you may already be locked into a mortgage deal where you have little flexibility and this can be a problem.
The key role when considering funding home improvement is to plan well in advance.
Home improvement and borrowing extra at purchase stage
The more you borrow on your mortgage, the higher the loan to value on that mortgage. With each mortgage product there is a limit to the maximum loan to value you can request. Therefore, you may find that borrowing extra initially can put you on a more expensive mortgage rate than you would have hoped.
If you do find you can borrow the funds you need for home improvement at the purchase stage, you may not need them immediately. Clearly, an ideal situation would be where you are not paying interest on your home improvement money until you are using it.
In these circumstances, a flexible or offset mortgage can be a good idea, allowing you to raise the funding now without paying the cost immediately.
If a property needs extensive improvement, that can mean particular complications with your mortgage. A property in a very poor condition may not be mortgageable. Alternatively, the valuer may suggest that the mortgage lender retains some of your mortgage funds until important remedial work is complete.
If your intention is a complete rework or alteration of the property you may need a specialist mortgage product.
Home improvement and borrowing after purchase
The first thing to bear in mind if you are seeking to borrow extra against your newly purchased property, is that most lenders will not allow you additional finance within six months of your purchase date (some not within 12).
Your primary mortgage lender may not offer additional lending, or may not offer additional lending on attractive terms. This is where second charge lending is key for the home improvement market.
Second charge lending is an additional secured loan secured against your property which you put in place in addition to your main mortgage lending.
Second charge example
Property value £250,000, current mortgage outstanding £140,000, mortgage required for home improvement £30,000
Our client has his first mortgage secured on the property at £140,000. This is the ‘first charge’, the additional lending is secured at £30,000 under a second charge. This means that in the event of non-payment of either of the two mortgages the mortgage lender can seek to repossess.
On repossession, the holder of the first charge (first mortgage £140,000) has the first claim on the sale proceeds, the second charge lender (home improvement loan £30,000) has the next claim on the sale proceeds, the owner receives the balance.
In this way, both the main lender, and the home improvement loan lender, have their security, and the property owner can obtain their home improvement loan.
Another advantage of taking a home improvement loan on a second charge is that secured loans are quicker and easier to arrange than main (first charge) mortgages. Funds could be available to you within two or three weeks.
Home improvement and equity
We often have enquirers confused about the value of the property and the equity within it when considering home improvement. Remember, your property will be valued as it stands for mortgage purposes, not as it will be after home improvement.
Therefore, you need to have sufficient equity in the property today in order to arrange your home improvement loan.
Second charge lending is available at up to 95% loan to value (the loan to value calculation includes your first charge lending). As with all mortgage lending, the lower your overall loan to value the more competitive your mortgage rate will be.
For help and advice on arranging a home improvement loan call us now on 020 8979 9684