Further Advance

What is a further advance?

A further advance allows you to borrow more money from your existing lender in addition to your current mortgage. It is a separate loan from your mortgage and, therefore, has a different interest rate. This interest rate may be higher than your current mortgage rate. Just like your mortgage, a further advance is secured against your property and is on a first-charge basis.

If you’re happy with your current mortgage deal and existing lender, a further advance can be appealing. Your mortgage deal won’t be affected as the further advance will run alongside it. This saves you from having to switch to a new deal and losing the rate or terms of your existing one.

You also won’t need to change to a new lender as you would with a remortgage or second charge mortgage. This prevents the risk of being penalised with an early repayment charge from your current lender. Your existing lender may also offer you a competitive interest rate for a further advance, making it an attractive option.

What can a further advance be used for?

There are numerous reasons to consider borrowing additional money via a further advance:

• You can use the funds to pay for home improvements that you’ve been planning. For example, fitting a new kitchen or bathroom, adding an extension, converting the loft or making your home more energy efficient. Once the work has been completed, the value of your home should increase as a reflection of these improvements.
• It allows you to raise a deposit to buy another property. For example, you may have dreamed of owning a holiday home or want to invest in a buy-to-let property.
• You can use a further advance to consolidate your debts into a single monthly payment. The interest rate should be lower than those payable for credit cards or personal loans as the loan is spread over a long term. However, just bear in mind that this long term means more interest has to be paid overall. Despite the lower rate, it’s a more expensive option in the long run.
• A further advance provides you with the funds needed to buy out an ex-partner following a separation or divorce.
• You can buy a share in the freehold of your property or a new extended lease.
• It enables you to make a large purchase or pay for a major event, such as buying a car or paying for a wedding.

Why opt for a further advance?

A further advance is quick and straightforward to arrange as you already have a mortgage with your lender. You still need to meet their criteria for this new loan, which we’ll explain below, but your lender already has your details, which speeds up the application process.

Your lender is also likely to offer you a competitive rate to take out a further advance with them. This may be higher than the interest rate you’re paying for your current mortgage but should be lower than alternative borrowing options, such as the rates payable for credit cards or personal loans.

As there’s no need to change to a new lender when taking out a further advance, this is a good option if you are happy with your current lender and don’t want to remortgage or take out a second charge mortgage via a different lender. It also means that you can keep your existing mortgage deal. This is important if you have a good mortgage rate that you don’t want to lose as well as terms that suit your needs.

Having a further advance allows you to spread the cost of your additional borrowing over a long term. This makes the reason for needing it, such as home improvements, a deposit to buy another property or debt consolidation, more affordable in the short term.

The criteria for a further advance

Affordability

To be eligible for a further advance on your mortgage, you need to pass your lender’s affordability checks for the new loan. Although your affordability was already checked for your existing mortgage, your lender needs to be sure that you can comfortably afford the new loan repayments on top of those for your mortgage. A new credit check will be made and your lender may also have a new valuation carried out on your property.   

Reason for the loan

You also need to meet your lender’s other criteria to be approved for a further advance. One of these is the reason for wanting to borrow more. Lenders differ on the reasons they are prepared to accept. Generally, however, home improvements, raising a deposit, debt consolidation, buying out an ex-partner, making a major purchase and buying the freehold of your property or a new extended lease are considered to be suitable.

You may be asked to provide documentation that backs up the reason for your loan request. For example, if you want to carry out home improvements, you may need to supply quotes related to the work needed. 

Minimum requirements

Lenders set minimum requirements for different aspects relating to a further advance. One is that you must have had your existing mortgage for a certain amount of time. This is usually a minimum of 6 months and it shouldn’t be in arrears.

Another requirement is the amount of equity that has built up in your property. Usually, at least 25% is needed before lenders agree to additional borrowing via a further advance. The amount that you can borrow will be capped, however. This is usually at a loan-to-value (LTV) ratio of up to 85% for your current mortgage and further advance combined.

Some lenders specify a minimum further advance amount, such as £10,000, and a minimum term, such as 2 years. Lenders often stipulate that a further advance must be taken out on a repayment basis. This is especially the case if your current mortgage is interest-only.

How much can you borrow with a further advance?

The amount you can borrow for a further advance depends on the equity in your property and the lender’s LTV. The equity is the difference between your property’s value and the amount that’s outstanding on your mortgage. The LTV is the ratio of the amount that can be borrowed compared with the value of the collateral. For a further advance, lenders usually offer an LTV of up to 85%. This means that your current mortgage plus the further advance cannot exceed 85% of your property’s value.

As an example, your property is valued at £250,000. An LTV of 85% is £212,500. You have £150,000 outstanding for your current mortgage. Therefore, the maximum further advance your lender can offer you is £62,500.

How long does a further advance take?

A further advance is usually much quicker to arrange than applying for a mortgage. This is because you’re staying with your current lender and they already have a charge on your property. No legal work has to be carried out on the property, which also saves time. Your lender needs to carry out new affordability checks so the timescale just depends on their process and that of the underwriters when reviewing your application.

Usually, you can expect to receive the loan within 4 to 8 weeks. You may even receive the funds faster than this if everything runs smoothly and your application is processed quickly. If a new valuation has to be carried out on your property, however, this can delay the process. Likewise, if any issues arise with your application, it can take longer to receive the further advance.

The advantages and disadvantages of a further advance

There are various advantages and disadvantages to consider before taking out a further advance:

Advantages

• This type of loan allows you to spread the costs of your additional borrowing over a long term.
• It offers a lower interest rate than those offered for credit cards or personal loans.
• The process is quick as you don’t need to change your lender or your mortgage.
• There is no legal process when arranging a further advance.
• Your existing mortgage isn’t affected so you don’t need to worry about losing the rate or terms you have with your mortgage deal.
• You won’t be penalised with an early repayment charge, which may be payable if you switch to another lender.

Disadvantages

• Interest is charged on the further advance loan, making the additional borrowing more expensive in the long run.
• The interest rate charged is different to the one charged for your existing mortgage.
• Fees are usually payable to arrange the further advance.
• The further advance loan has a separate end date from your mortgage term.
• Having a further advance may affect your ability to remortgage in the future.
• This loan is secured against your property in addition to your existing mortgage, putting it at risk if you’re unable to make your repayments.

The costs involved with a further advance

The fees charged to arrange a further advance vary between lenders. Our mortgage brokers can check your lender’s fees so that you know exactly what the charges are before applying. A further advance can be cheaper than other borrowing options as no legal work is needed for the transaction. This means that you don’t have to pay any fees to a solicitor, which you would if remortgaging, for example.

Alternatives to a further advance on your mortgage

Before proceeding with a further advance application, consider the alternative options available to ensure that you’re making the right choice. For example, a remortgage, second charge mortgage, bridging finance, equity release or a personal loan. It’s important to compare the costs, terms and potential risks of each. Our mortgage brokers are available to make these comparisons for you, saving you time and money in the process.

Remortgage

Remortgaging is when you change your current mortgage to a new one with a different lender. If you’ve built up equity in your property, you can increase the amount you borrow. This makes it a suitable alternative to a further advance. Just bear in mind that you may have to pay an early repayment charge to your current lender, which can be very expensive. You also have to pay fees to the new lender for arranging the remortgage.

With a remortgage, you pay one interest rate and have one end date for the term. This is different from keeping your original mortgage and taking out a further advance. In this scenario, you pay two interest rates and have two separate end dates for the loan terms.

Second charge mortgage

A second charge mortgage is another type of secured loan, which uses the equity in your property as collateral. This mortgage is taken out in addition to your first mortgage and is arranged via a different lender. The new lender places a second charge against your property. This means that they are second in line to be repaid for any outstanding loan amount should your property be sold.

As the new lender has less priority than the lender for your current mortgage, they have a higher level of risk. As such, they charge a higher interest rate to compensate for this. This can make a second charge mortgage more expensive than a further advance. However, you may prefer this option if you want to keep your existing mortgage and use a different lender for your additional borrowing. You need to get permission from your current lender to apply for a second charge mortgage. You also have to prove your affordability for both mortgages to the second lender.

Bridging finance

A bridging loan is a type of short-term finance, with loans typically taken out for up to 12 months. The minimum loan amount tends to be £25,000 and you don’t need to pass an affordability check. Instead, the loan is secured against your property, multiple properties or another asset that you own. This means that a bridging loan is quick to arrange and you can rely on having fast access to the funds you need. You need to have an exit strategy confirmed with the lender, which is how the loan is to be repaid at the end of the term.

Due to the speed and flexibility of bridging finance, the interest rate charged is higher than for other loan types. There are also various other bridging loan costs to take into account when weighing this up against a further advance. Our mortgage brokers can advise you of these costs and give you an accurate comparison between the two options.

Equity release

If you’re over 55, you can take advantage of an equity release product, such as a lifetime mortgage. You can release the equity that’s built up in your home and receive a tax-free lump sum or smaller sums at intervals. The loan is secured against your home but you don’t have to make monthly repayments and there’s no fixed term. Instead, the loan is repaid when you either move into long-term care or pass away, at which point your home is sold. The interest charged is usually compounded, which can make it a more expensive option in the long run. You can choose an interest-paying option if you prefer.

Personal loan

This is an unsecured loan and, therefore, doesn’t put your property at risk. The interest charged on a personal loan is usually higher than for many types of secured loans. This makes the repayments higher but, as a personal loan has a shorter term, it is usually cheaper overall. 

Is a further advance right for you?

Whether or not a further advance is right for you depends on your circumstances and reason for wanting to borrow additional funds. It can be an appealing option if you don’t want to remortgage, especially if your lender offers a competitive rate. As you already have a relationship with your lender, the process is faster and more straightforward than having to deal with a new lender.

However, if you’re not satisfied with your lender, want to borrow a larger sum of money than you can with a further advance or want to shop around for more flexible terms or a better rate, a remortgage or second charge mortgage may be better for you. On the other hand, an unsecured loan is worth considering if you’re uncomfortable with putting your property at extra risk. Therefore, you need to weigh up the advantages and disadvantages of having a further advance and research the alternative lending options available.

It’s best to speak with one of our mortgage brokers before making a decision as they can do all of the research on your behalf. They can check your current lender’s fees and terms for a further advance as well as compare the terms and fees for alternative options. This not only saves you time but can potentially save you a considerable amount of money. There may be a financial solution that’s better suited to you, which you hadn’t previously considered. Providing you with impartial advice, our mortgage brokers can ensure that you make an informed decision that’s right for your needs.

Simply give us a call on 01322 907 000 for expert advice on your borrowing options. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage brokers – based throughout Kent, London and Edinburgh – will be in touch as quickly as possible to answer any queries you have about a further advance. Once you’ve made a decision on your additional borrowing, your dedicated broker will help you with the application and oversee the entire process to ensure that it runs smoothly.