Additional mortgage borrowing
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How it works
Releasing some of the available equity in your home - otherwise known as the property ‘value’ or ‘collateral' - is a relatively straightforward process.
If you need to get your hands on some extra cash, whether it’s for home improvements or to fund a sizable purchase, we’ll talk you through some of the steps involved so that you’re not going into it without at least some degree of insight.
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The basics explained
It may seem an obvious point to make, but if you want to extract some of the cash that’s tied up in your bricks and mortar then your property has to be worth more than you originally paid for it.
Have a look at the example below to see a typical calculation that might help you understand this in a little more detail.
Let’s assume that you bought your home for £80,000 five years ago and that it’s now worth £100,000.
That means you have £20,000 equity - or collateral - tied up in your home.
Now, it’s unlikely that you’ll be able to release all of that £20,000 as most mortgage providers will only lend up to 95% of the property value. But let’s assume you're able to borrow up (and including) 95% of the property value in this particular scenario, which could mean you’d be in a position to borrow an additional £15,000 to help with whatever home improvements (or purchases) you want to make.
£100.000 property value x 95% = £95,000
Outstanding mortgage = £80,000
Available equity = £15,000
If you’re in the unfortunate situation where the outstanding balance of your mortgage is higher than the value of your actual property, you're in what’s called ‘negative equity’. That means any additional borrowing secured against your home simply isn’t an option. There isn't enough equity in there for you to drawdown.
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Things to be aware of
Naturally, your monthly mortgage repayments will increase, meaning that the more you borrow the higher your new repayments will be too. It may be that your repayments (both your existing mortgage and the additional borrowing) will be debited as separate amounts, depending on the new interest rate package you choose and the term you opt for when considering your additional borrowing.
As an example, let’s say that your current mortgage has ten years left, but that you want to repay your additional borrowing over 5 years. In that instance you will have two separate loan repayments that, together, increase what you were paying previously. One will finish (subject to your making all the repayments and adhering to the bank's terms and conditions) after five years, the other after ten years.
But before any of that and before you while away the hours dreaming of a brand new kitchen, remember that any additional borrowing will need to be considered very carefully by your bank. They will decide whether you are financially capable of making the increased repayments or not - put quite simply. -
Establishing affordability
The majority of home owners borrow additional funds for home improvements, because it's often cheaper to stay put and work through your domestic jobs than it is to move home. Although there’s nothing to stop you from using the money you borrow for something else instead.
You cannot borrow for business purposes or for any other purchase that’s business related, so be mindful that you’ll need your lender to approve the reason for your additional borrowing in as much as they’ll need to approve your ability to repay it back too.
Another thing to be aware of is that additional mortgage borrowing means the extra debt is secured against your home, in the same way that your original mortgage debt is secured against your home too.
In the worst case scenario, you could actually lose your home if you can’t keep up with the new, higher repayments. So be aware of what you are entering in to and read any terms and conditions carefully.
If you're interested in discussing any aspect of additional mortgage borrowing, have a chat with your current mortgage provider who will be happy to talk you through your available options.
