If you’re struggling with your debts, additional borrowing on your mortgage to take care of them can be a good idea.
If your property has increased in value since you first took out your mortgage, you could borrow a further advance from your mortgage provider.
Before you do this, you must weigh out the pros and cons and determine whether this would be a sensible decision for you.
Today, I’ll discuss all the pitfalls and benefits associated with getting a further advance on your mortgage to help you make an informed decision.
What is a Further Advance?
A further advance would mean you borrowing more money from your current mortgage lender against your property.
The interest rate for this additional loan would be different from your main mortgage.
People usually opt to get a further advance if:
- The interest rate for the mortgage lender’s further advance is lower than that of their main mortgage.
- They don’t want to get a remortgage or go to a different mortgage lender.
Just like your main mortgage, you can have a long-term repayment plan for the further advance that you take out. The interest rate on a further advance is usually lower than a personal loan.
You should always scout out the market in order to be sure that there isn’t a better deal out there than the further advance you’re about to take out from your current mortgage lender.
When is it Usually a Good Idea to Get a Further Advance?
It may be sensible for you to get a further advance if:
- You need money for home improvements. Improving your home will increase the value of your property. Thus, in a sense, the further advance will “pay for itself”.
- You need money in order to raise money for a deposit to buy a second property. This is especially the case if you’re buying a second property as a buy-to-let investment. You could then use the money obtained from the tenant’s rent in order to pay off your further advance as well as your main mortgage.
Is it a Good Idea to get a Further Advance to Pay Off My Debts?
As I mentioned above, the two situations above are a sensible way of spending your further advance.
However, getting a further advance in order to pay off any other outstanding debts you may have is generally not a good idea.
This is because the further advance you take out is against your property and thus, you would be putting your home at risk.
If you fail to make your repayments towards the further advance and your main mortgage punctually, you could lose your home.
While the interest rates on mortgages are certainly lower than most personal loans as well as credit cards, you may still end up paying much more in interest in the long term.
Before you look towards getting a further advance in order to take care of your debts, I highly suggest that you look towards other options.
You can try to lower your monthly expenditures so you have more money left over in order to make monthly payments towards your outstanding debts.
If that doesn’t work, you also have other options available to you such as an Individual Voluntary Arrangement (IVA), a Debt Management Plan (DMP) or a Debt Relief Order (DRO).
If you’re struggling to pay off your debts and you have a mortgage loan to attend to as well, I highly suggest contacting a professional.
You can try and get in touch with an independent debt charity such as StepChange or Payplan.
They have professionals that will assess your financial situation and provide you with the best debt solutions suited to your particular circumstances.
Not only that but they will guide you through the process of whatever debt solution you choose as well.
How can I Work out how much I can Afford?
In order to calculate how much you can afford, you have to figure out how much you’ll be borrowing to pay off your debt and what the additional monthly payments are going to look like.
You should contact your mortgage lender and explain to them what you have in mind.
Lenders will assess your budget, your expenditure as well as how much you’ll have to pay in monthly payments.
Your expenditure will include your original mortgage payments, any payments you’re making towards other debts such as credit cards, your living costs, etc.
They will then look at your income and assess whether or not you can afford additional payments towards your further advance.
They will also ‘stress test’ you by assuming if you’d be comfortable with making payments if the interest rates were to increase, if your income were to decrease or if you were to incur any additional debt.
Mortgage providers will only encourage you to get a further advance if they’re confident you’ll be able to pay it back comfortably.
Please note that most mortgage providers are authorised and regulated by the Financial Conduct Authority and they are not allowed to coerce you into a payment plan you can’t afford.
You should ask your mortgage provider whether you have to borrow the further advance over the full term of your mortgage or whether you can borrow it over a shorter term.
Furthermore, you should ask for the final cost as well as any other fees that may be included with getting a further advance. These fees may vary depending on your mortgage provider.
What are Some Things to Keep in Mind before Applying for a Further Advance?
If you’ve assessed your situation and you feel that opting for a further advance would be the right decision, then here are some things you should keep in mind that can help you:
- You should ensure you have a good credit record. You can maintain a good credit score by making regular payments towards your main mortgage debt as well as making punctual payments towards any other debts you may have.
- Ensure that you are comfortable with the additional payments you will have to make once you get a further advance. Being unable to make payments once you get a further advance could even increase your debt.
- You must ensure that the value of your home has increased since you first took out your mortgage.
Can I Consolidate My Debt with a Further Advance?
While you can definitely consolidate your debt with a further advance, this is generally not a wise decision and you should thoroughly assess your situation before opting for this.
It’s essential that if you’re opting for debt consolidation using your further advance, you should make sure that it’s worth it for you.
A further advance may have additional costs and you may not even be able to secure one if your mortgage is already above 80%.
If you’re considering debt consolidation using your further advance, I highly suggest contacting a debt professional before making your decision.
They will assess your finances and inform you of whether or not it would be prudent for you to consolidate your debt using a further advance on your mortgage.
Would it be Better to just get a Remortgage?
Getting a new mortgage over your current one is also an option that is available to you. However, you must thoroughly assess whether or not this would be worth it.
Getting a new mortgage deal would include application fees towards the new mortgage provider.
Not to mention that if you’re already in a mortgage when you’re applying for a remortgage, you will have to pay an early repayment fee to your old mortgage provider.
All of these costs combined could mean that getting a remortgage could just land you in more debt than what you were initially in.
If you feel that you’re getting a better deal with another mortgage provider given the early repayment fee to your old one as well as the application fees to the new one, then you should go for it.
Mortgage debt costs can be quite competitive and it’s usually a good idea to research and find the best one for yourself.
While it may be tempting to pay off your outstanding debt using a further advance on your mortgage, it can be catastrophic in the long run.
If you recklessly opt for this option, you may find yourself in more debt than what you started with.
Thus, it’s important that before you make such a decision, you must assess your finances thoroughly in order to ensure you can make all the payments involved comfortably.