For homeowners, one of the first places to turn to when needing to raise some capital is their mortgage lender. Raising finance on the back of a property can be a low-interest solution to finding the cash to pay for anything from home improvements to more serious cases of debt consolidation.
With the low interest environment experienced over the past 12 months, advisers have reported constant growth in the remortgage market, with borrowers jumping from lender to lender to get the best rate. However, remortgaging may not be the best option for certain clients and it is important borrowers are made aware of the other options available when it comes to raising finance from the equity in their home.
In addition to remortgaging, clients may also want to consider a further advance ‘ where their current lender will release additional funds under the original mortgage contract ‘ or a second charge mortgage, which is taken with a different lender and secured on the increased value of the property.
According to Simon Stern, director of Sheldon & Stern, the secured lending market is experiencing the same boom as remortgaging has.
‘Both the remortgaging and second charge mortgage markets have grown significantly over the past five years. Increases in property prices, low interest rates and a more stable job market have obviously all contributed to this along with the increase in the number of companies entering the market,’ he says.
But which method is best for which clients? Mark Charlesworth, managing director of The Mortgage Operation, says: ‘The first things to consider when looking at your options is who your existing mortgage is with, what the rate is, what the redemption terms are and how much equity you have in the property. You have to ask whether your circumstances have changed since you took out the mortgage and for what purpose are you looking to take finance out. Once you have the answers, you can decide which is the best route.’
How your client intends to spend the money will help you decide which route to recommend. Increasing the equity in your home by spending the money on home improvements will be seen in the best light. But using money to help finance a new business start-up, or pay off other debts, for example, will be seen as more risky and borrowers may be unable to remortgage or get a further advance from their current lender.
‘Unless the loan is used for home improvements, quite a lot of lenders would treat it as a secured loan, so paperwork changes which many lenders are not geared up to, meaning they charge higher rates. Under those circumstances it may be better to look at a second charge loan,’ says Charlesworth.
Getting best value
However, for clients that are eligible, remortgaging can often provide the best value route. Steve Blore, spokesperson for Nationwide, says: ‘There are between two and three million people paying standard variable rates up to 6%. If they are on a normal variable rate with another lender, there are fixed rate or tracker deals that are considerably lower than that and which could save borrowers hundreds of pounds a year just by remortgaging.’
Not all mainstream lenders necessarily see debt consolidation as a bad risk, however the lower the borrowing requirements, the more lenient they tend to be.
‘If people are looking to reorganise their finances, we can do it in a way that also releases capital while leaving them paying no more than they were paying for with their existing mortgage,’ says Blore.
The downside of remortgaging lands with fees and lengthy waiting periods. Valuation and legal fees will have to be paid and the extra funds will be slow to reach the borrower ‘ even if there are no administration hiccups.
‘The benefits of remortgaging only kick in if your existing mortgage rate is not good and you are prepared to wait at least four to six weeks for the loan to come through. If you are not tied to your current lender and you can get a better rate elsewhere, then the remortgaging option starts to look good,’ says Charlesworth.
If a client has to pay hefty redemption fees, this may mean remortgaging is not the best way to go. In this case, there are two sensible options available to clients. The first comes in the form of a further advance.
If a borrower has a good first mortgage with a competitive rate, then it makes more sense to stay put and apply for additional funds from their lender. This can be particularly beneficial if the client is currently tied in to a fixed deal ‘ unlike remortgaging, no redemption penalties need to be paid.
Bloare says: ‘If it is a current customer we can give them a further advance if they want to improve their property, or if they want to borrow money for other reasons.
‘If they have got an existing deal tied into a fixed rate, a further advance is probably the best way to go until the terms of that deal are finished.’
New underwriting checks still have to be carried out to monitor borrowers’ current circumstances, even if they already have a mortgage with the lender. Although the further advance will be included under the original mortgage contract, varying terms may mean a new credit agreement has to be signed. It may therefore be wise to check out deals offered by other lenders.
However, if the existing lender offers a good rate and accepts the reasons for the loan it may be best to stay put.
‘If you are on a good deal at the moment you are more than likely to be better off staying with your lender,’ says Charlesworth.
Breaking the mould
For clients that do not fit the lending criteria for remortgaging or further advances, a second charge mortgage ‘ or, as it is better known, a secured loan ‘ may be the answer.
Much like sub-prime lenders in the first mortgage market, second charge mortgage lenders provide a much welcomed solution for clients who find it difficult to get a mainstream loan due to reasons such as credit rating, occupation and the purpose of the loan.
Colin Sanders, chief operating officer at igroup, says: ‘Rigid lending credit assessment criteria typically fails to take into account the variety of modern lifestyles.
‘For example, potential borrowers with a recent change in employment status or a short history of payment arrears could be automatically excluded from receiving either a further advance on a first mortgage, or obtaining an unsecured loan.’
As seen in the sub-prime market, applicants for secured loans are rising as people find it harder to keep a lily-white credit history.
Stern says: ‘Clients who have debt problems such as credit card defaults and mortgage arrears, or are self-employed with no proof of income are most likely to be suited to a second charge mortgage in preference to a remortgage or further advance.’
Unlike remortgaging there are no additional fees to pay, the transaction is speedy and lenders tend to offer higher income multiples.
Richard Geekie, adviser at Hull-based brokerage Anlaby Financial Services, says: ‘I deal with a lot of clients who fall into the adverse market and if they need to raise further finance, often their only option is a second charge mortgage.
‘There are big cost advantages ‘ there is no valuation fee, arrangement fee or solicitors’ fees.
‘Also you are not unlocking redemption penalties for that client, as opposed to remortgaging. It is also very quick ‘ you are looking at 28 days from start to finish. The only disadvantage is that clients are ultimately paying more interest.’
Secured loans can also have a shorter repayment term than a remortgage. ‘Applicants are not necessarily suited to a remortgage which then ties them in for 20-25 years when they can take out a secured loan for five to 10 years,’ says Stern.
Despite these benefits, clients often choose a secured loan simply because they can not get good value credit from their current lender. ‘Quite often the reason clients ask for the extra finance will not be accepted by the current lender, or they may only offer it to them on a standard variable rate. Then it may be worth their while to move to a different lender,’ says Charlesworth.
However, Geekie says it is commonplace for second loan mortgage lenders to enforce a six-month interest penalty if borrowers want to pay off the loan early. ‘On most secured loans there is not the same flexibility to pay off lump sums as there is with remortgaging,’ he says.
There are pros and cons for each borrowing method. Individual clients have individual needs and there is no short cut to find out which method suits them best. The key is to treat each case separately and look past the remortgaging option, as the best deal could lie somewhere else.
Kirstie Redford is senior staff writer