Second Mortgage for Home Improvement? Allowed?
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Is it possible to take out a second mortgage for home improvement projects? We answer this question in detail here. And we discuss other methods of funding home improvements so you have all the information to make the right decision for your family.
If you’ve been looking for a way to pay for home renovations, you’re in the right place!
Can you get an extra mortgage for home improvements?
There are different methods of borrowing that can help fund home improvements. One option is to take out another mortgage on your home. This is known as a second charge mortgage.
We discuss this option in detail and explain some of the alternative methods of financing home improvements towards the end of this guide.
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What is a second charge mortgage?
A second charge mortgage – sometimes just called a second mortgage – is a secondary mortgage added to a property. The first charge mortgage is the mortgage used to buy the property and the second charge mortgage is a mortgage that lets you borrow against your home equity. Thus, it is secured against the equity built up.
You can calculate the amount of equity in your property by subtracting what you have yet to pay on your first mortgage away from the value of the property. You must use the current value of your home and not what you paid for it.
These types of mortgages are usually offered through high-street banks, building societies and dedicated mortgage lenders. There are commercial services available that will help you search the market for suitable providers and even help you apply. You may have to pay commission for these types of mortgage services.
How does a second charge mortgage work?
A second mortgage will pay you a lump sum amount that is to be repaid every month for a fixed term. Your monthly repayments will include the principal amount and an interest rate you agreed to within the credit agreement. The amount you can borrow will be based on your home equity, as well as your personal finances and your credit score.
Because the mortgage is secured against your home equity, if you repeatedly fail to keep up with payments the lender can repossess the property and sell it to recover the debt.
However, the main mortgage used to buy the property has priority over the sale money so that mortgage is repaid first. Only then can the second mortgage lender recover the second mortgage debt. Any remaining funds would be the debtors to keep.
Is a second mortgage and home equity loan the same thing?
If you have ever heard of a home equity loan before, you may be struggling to see the difference between a second charge mortgage and a home equity loan. Lots of people consider home equity loans and home equity lines of credit (HELOCs) as a type of second mortgage.
You can learn all about home equity loans here!
Can I use a second mortgage for home improvements?
The loan received from a second mortgage can be used to complete all types of home improvements. You could take out a small second mortgage to redecorate your home or buy new electricals and appliances. You may choose to take out a larger second mortgage to fit a new kitchen or bathroom or even add an extension to the property.
Can I use a second mortgage for renovations?
You can also use the money from a second mortgage to pay for large renovations, which may include remodelling the layout of your house by knocking through walls. The trend in open-plan kitchens and living rooms has seen a rise in people using a second mortgage for these types of large-scale renovations. Other common uses include loft conversions and adding conservatories to a home.
Can I only use second mortgages for home improvements?
The money loaned through a second charge mortgage is the homeowner’s to use as they wish. They could use it for one reason or have earmarked multiple uses for the mortgage. It just so happens that home improvements and home renovations are two of the most common reasons for borrowing against property.
Another common reason someone may choose a second charge mortgage is to consolidate debts. Some even use the money as a deposit on another property, such as a holiday home.
Why use a second mortgage for home improvements
There are many reasons why using a second mortgage for home improvement projects can be a good idea. The first is that these mortgages can provide a level of additional borrowing that is not available elsewhere. If you have large amounts of home equity, you may be able to access credit way in excess of unsecured loans and credit cards. And it is possible you could get a lower interest rate in comparison too!
Another benefit of borrowing against home equity to fund these types of projects is that they can actually add value to your property and therefore add equity to your home again.
If you do decide to use a second mortgage, only consider borrowing from a lender that is authorised and regulated by the Financial Conduct Authority (FCA).
The downside of a second mortgage for home improvements
There is another downside of a second mortgage, other than the potential risk of losing your home if you cannot keep up with long-term payments.
By taking out another mortgage you are subjecting yourself to other loan fees and possibly additional closing costs to pay at the end of the mortgage term. When comparing different ways to fund a home improvement project, you should compare these fees as well as interest rates. Make sure you shop around.
Other ways to fund home improvements
As mentioned at the start of our article, a second charge mortgage is just one way of funding a home improvement project. There are other financial products you could use to access credit.
Here are some of those options summarised:
- Refinance an existing mortgage
Instead of taking out a new mortgage, you could switch your current mortgage to fund a home improvement idea. You might be able to do this with your current lender or a different one. It works in the same way as remortgaging, which is when you find a new mortgage with a better deal and use it to pay off your current mortgage.
But instead of taking out a new mortgage with the same value you owe to your existing lender, you take out a little more. For example, you could take out a new £150,000 mortgage to pay off a £125,000 mortgage owed to your current lender, leaving you with an additional £25,000 loan secured in the new mortgage.
The ability to do this will be determined by your home equity, finances and credit score. You should bear in mind early repayment charges. By paying back your first mortgage earlier than planned, you could end up paying early repayment charges on that mortgage.
- Home improvement loans
There are even loans specifically offered to fund home improvements, namely home improvement loans. These are a type of personal loan that provides a lump sum amount to be repaid each month with interest over a fixed term. You can get both unsecured and secured home improvement loans.
The secured type is highly identical to a home equity loan because they are usually secured with home equity. And because home equity loans and second mortgages are often considered the same, then a secured home improvement loan and second mortgages are highly similar as well.
- Home equity line of credit (HELOC)
A home equity line of credit is a variation on a home equity loan. The difference between them is that a HELOC is not paid out in one payment. The homeowner borrows against home equity but draws money from their loan over a fixed period known as the draw period. If you’re having difficulty imagining how this works then think about how someone may draw money from an agreed amount on a credit card.
Only interest on the loan needs to be repaid during the draw period. Once the draw period has ceased, both the principal and interest need to be paid back each month until the full loan is cleared.
A HELOC can be beneficial for home improvement projects because the way the money is accessed in instalments can assist with budgeting and planning for larger projects requiring building work. It also allows the homeowner to pay back more of the money later rather than immediately when their expenses may be much greater.
There is no concrete answer about which of these methods is the best way to pay for home improvement projects. Whether you should choose a home improvement loan, home equity loan, remortgage or a second charge mortgage should be based on your personal situation and risk preferences.
First mortgages and home improvements
You should also be aware that it is possible to fund home improvements with a first mortgage, and we’re not referring to refinancing it. If you are buying a property that you know you plan on making changes to, you can ask to borrow more on the first mortgage for this reason.
For example, if you need a £200,000 mortgage to buy a property and estimate that renovating the property will cost an additional £40,000, you could search for initial mortgages of £240,000 instead. Whether you can access a mortgage to buy the home and complete a renovation will depend on the mortgage lender and your personal finances.
This is good to know if you haven’t bought yet or if you’re planning to buy a “fixer-upper” in the coming months.
Can you add remodel costs to a mortgage?
The situation described above is also possible if you want to remodel a home you wish to buy. Instead of just asking for the money to buy the home, you could ask for the money to buy the home and to knock down walls to renovate the property entirely. However, this is more difficult than asking for an extra couple grand to improve the kitchen etc.
Because you are changing the structure of the asset, there is a greater risk to it and the mortgage lender could be a little more apprehensive about lending to you. They may want to know the fine details of the project or you may even require a self-build type mortgage instead.
Read other second mortgage support guides FREE!
This is just one of our new series on second mortgages. You can learn much more about these products as a vehicle to fund home improvements at MoneyNerd. Why not start by reading the pros and cons of second mortgages first?
We’ve got bags of useful information for you all for free!