Borrowing Against Your Home: What You Need to Know

Can I Borrow Against My House?

Yes, you can, especially if you have a significant equity build-up in your home – the surplus of your property’s worth over the remaining balance on your mortgage. 

Let’s say, your home stands at a market value of £200,000 and you have £150,000 left on your mortgage; this means you have a £50,000 cushion of equity (assuming a stable property value).

You mainly have three paths to tap into this equity:

• Remortgage – This option allows you to secure a new mortgage to access more funds or snag a better deal. But remember, you might have to shoulder early repayment charges if you’re not nearing the end of your current deal.
• Secured Loan – This refers to a loan wherein your home serves as collateral, safeguarding the lender’s investment.
• Further Advance Mortgage – lets you borrow extra funds from your current mortgage provider, using your home as collateral.

Remember, failing to keep up with the repayments could put your home at risk of repossession. So, before you plunge in, analyse your options thoroughly. 

Depending on your circumstances and the purpose of borrowing, a personal loan or a 0% purchase credit card might offer a better solution.

How to Choose the Best Way to Borrow Against Your Home

Your financial background and your plans for the funds dictate the best borrowing route for you. Generally, people opt for a secured loan when they need to borrow a hefty sum, often exceeding £100,000.

On the other hand, you might favour a further advance mortgage or remortgage for financing home improvements or securing a deposit for another property.

Why Consider Borrowing Against Your Home

Embarking on this journey offers several perks, such as:

• Access to Larger Funds – Your property’s value could allow you to borrow a hefty sum.
• Lower Interest Rates – Since your property acts as a security net, lenders might offer lower interest rates compared to personal loans.
• Extended Repayment Duration – This choice often means you can spread your repayments over a longer period, possibly resulting in more manageable monthly instalments.
• Friendlier to Those with Poor or Limited Credit History – Lenders might show a kinder face as your loan is safeguarded by your property.

What to Watch Out for When Borrowing Against Your Home

However, this venture also has its drawbacks, including:

• Your Home is on the Line – Since your home backs the loan, you might lose it if you fail to keep up with the repayments.
• Potential to Incur Hefty Interest Over Time – Despite potentially lower interest rates, the long tenure could rack up a sizable interest amount over time.
• Possibility of Additional Fees – You might encounter various charges such as administrative costs, legal fees, valuation or broker fees, depending on your lender’s terms.
• Higher Interest Rates with Further Advance Mortgages – This option generally comes with higher interest rates compared to your primary mortgage.

How Much You Can Borrow Against Your Home

Your borrowing capacity depends on various factors like your credit history, income, the equity in your home, and the method you choose to unlock funds:

> Secured Loan – Typically grants the leverage to borrow substantial amounts, often exceeding £25,000.

If you’re considering a secured loan to borrow against your home, try to use the calculator below to get an idea of what your monthly repayments might be. 

[Embedded Secured Loans Calculator]

> Remortgage or Further Advance Mortgage – Use our handy mortgage calculators to estimate the amount you can borrow comfortably.

While these figures provide an estimate, it’s wise to consult with a mortgage advisor who can help you grasp the full picture, inclusive of all potential fees and costs. This way, you can make an informed decision that aligns well with your financial goals and circumstances.

Understanding the Loan to Value (LTV) Ratio

Getting to grips with the loan-to-value (LTV) ratio can be a game-changer when it comes to how much you can borrow against your home. This number, which plays a significant role for both home buyers and people looking to remortgage, gives lenders a clear picture of the borrowing risk.

The LTV is a way of expressing the size of the loan you are taking out as a percentage of your property’s value or the amount of equity you have built up in your home. It helps you understand how much ownership you have in your home compared to what you still owe on it. Lenders carefully examine this ratio to decide whether to approve a loan and the terms they can offer.

In short, a higher LTV ratio means a higher risk for lenders, because they are less likely to recover their money by selling your home if you cannot repay the loan.

There is a cap on the LTV ratio for homeowner loans in the UK. If you exceed this limit, your loan may not be approved or you may need to get mortgage insurance to protect the lender’s interest if things don’t go according to plan.

Your LTV also affects the interest rates and loan amounts you can get. A lower LTV usually results in lower interest rates and easier monthly payments. 

This helps you manage your budget throughout the loan period. It can also help you get access to larger loans and better deals, especially if you’ve been consistently paying your mortgage and your home’s value has increased.

How to Work Out Your LTV

Calculating your LTV is simpler than you might think. You just divide the amount you want to borrow by the total equity in your home.

LTV = Loan Amount / Home Equity

So, if your home equity stands at £400,000 and you plan to borrow £260,000, your LTV comes out to 65%. Remember, if you’re still paying off your mortgage, you need to subtract that remaining balance from your home’s value to find your equity.

For instance, if your home is worth £400,000 and you have £70,000 left on your mortgage, you’re left with £330,000 in equity. Now, if you intend to borrow £260,000, your LTV jumps to 79%.

Don’t Overlook Additional Expenses

Aside from figuring out your LTV, you should be aware of other potential costs.

Appraisal Fees

An appraisal might be needed to verify that your home’s value matches the amount you intend to borrow. Though the lender will handle this, the fee might be your responsibility, and it can vary based on different factors such as your home’s location or value.

Insurance Costs

Lenders often insist on home insurance, particularly when the LTV is steep. This kind of insurance serves as a safety net for both you and the lender, covering damages to the property structure or in case you find yourself unable to make repayments.

Can You Secure a Loan Against Your Home with Bad Credit?

Having bad credit can indeed pose challenges when seeking a loan, but it doesn’t close all doors. Lenders might still extend a credit offer to you if you can secure the loan with a high-value asset, such as your home. 

This strategy reassures lenders of repayment, albeit with the stark risk of losing your home if you fail to meet the repayment obligations.

Are You Eligible to Borrow Against Your Home?

To qualify for a further advance mortgage, remortgage, or secured loan on your home, you must already hold a primary mortgage. Lenders will also request information on your:

• Current income and expenditure patterns
• Credit history
• Available equity in your property
• The present market value of your property

Can You Use Your Home Equity to Purchase Another Property?

Yes, many homeowners successfully use the equity in their home to invest in another property, be it for rental purposes or a new residence for themselves. 

When you release these funds, you can utilise them as a down payment for the new property, albeit you must demonstrate your ability to manage increased mortgage repayments on your initial home.

Should You Consider Borrowing Against Your Home?

Opting for a second mortgage or a remortgage might be the right step for you if:

• You find it difficult to secure unsecured credit, such as personal loans or credit cards.
• Your credit score has recently decreased.
• You plan to renovate your current home or invest in a new property.

However, it may not be the best option if:

• You are already struggling to make your current mortgage payments, as this will involve additional or higher monthly repayments.
• You intend to consolidate existing debts, as this borrowing method typically means paying more interest over a longer period, which could cost you more and increase the risk of losing your home.

How Can You Borrow Against Your Home?

If you have concluded that borrowing against your home aligns with your financial goals, begin by:

• Comparing deals for secured loans
• Evaluating remortgage options

Alternatively, consider discussing a further advance mortgage with your current lender. 

Remember, consulting a mortgage advisor before making any decisions always stands as a good practice, helping you not only assess the interest rates but also understand the total cost throughout the borrowing agreement.

If you want to find the right broker without hassle, get in touch with us. We’ll connect you with a broker who will listen to your situation and create the best possible solution.