Second charges provide flexible and higher LTV alternative to remortgaging for renovations – Westley

This survey by Checkatrade confirmed anecdotal reports that multiple lockdowns have inspired homeowners to make changes to their property, and this trend is expected to continue throughout 2021.

Unsurprisingly, one of the most popular jobs is creating a home office, often with a loft conversion.

The relaxation of permitted development rights in recent years has made it easier for homeowners to build larger extensions without having to go through the rigmarole of seeking planning permission.

How are people paying for the work?

A traditional way of funding home improvements has been to capital raise with a remortgage, but this is not the only way, and it’s not necessarily the best – particularly in the current environment.

The availability of higher loan to value (LTV) mortgages is improving on the second half of last year, when options were particularly restrictive, but it is still challenging.

The situation is even tougher for people who are self-employed or have more complex sources of income, as many mainstream lenders are taking a more cautious approach to affordability in these circumstances.

So, the ability to secure the loan size required to complete a home improvement job is often limited through affordability or LTV.

Flexibility and higher LTVs

However, the second charge market can provide brokers with a cost-effective solution for clients who want to invest in home improvements.

There are options in the second charge market that provide access to higher LTVs than available in the first charge market, and affordability calculations can sometimes provide clients with greater borrowing potential.

Importantly, it is also worth noting that in many instances, major improvements are likely to result in a significant increase in the house price.

This means it can prove beneficial to take a second charge mortgage to pay for the work and then remortgage at the higher property value and, therefore, a lower LTV.

This approach could help a client to benefit from a lower first charge mortgage rate in the long term.

So, if you have clients who want to renovate or extend their home, and are considering their options, a second charge mortgage could provide room for improvement.