Getting a further advance simply means getting further borrowing on your current mortgage. This is a cash borrowing. You might be able to do this if the equity you have in your home has risen due to the value of your home rising or due to the monthly mortgage repayments you are making.
In this brief guide we will discuss the pros and cons of a further advance on your mortgage, when you should do it and when you probably shouldn’t.
What is a further advance?
A further advance is essentially when you borrow more money from your current mortgage lender. Your mortgage lender will usually grant you a further advance but at a slightly higher rate than your existing mortgage. The good thing about a further advance is that the interest rates on offer are usually lower than those on offer on personal loans and you will be able to pay back the further advance over a longer time frame.
Whilst this might sound like a great thing it is very likely you will pay more interest over the term of your further advance than with a personal loan due to the long term in which you are given to pay it off. You can mitigate this risk by overpaying your mortgage to cover the further advance which you took out or asking the mortgage lender for a much shorter mortgage term.
If you intend to overpay the mortgage to cover the further advance you previously took out you should be aware of mortgage fees your mortgage lender could charge you such as an overpayment fee. Your mortgage lender will usually allow you to overpay up to 10% of your outstanding mortgage per year.
Further advances on your mortgage are a good option when
- The mortgage rate offered by your current mortgage lender is favourable in comparison to the personal loans out there. Remember when you are comparing the further advance against your personal loan you should take note of the total interest you will pay on both the further advance and the personal loan for their respective terms.
This should give you a better comparison of the total cost to you. Be sure to play around with the further advance term to see how the total interest rate cost will fall if you reduce the term. You should also consider how the amount of interest you pay will fall if you were to overpay your mortgage and ask your lender if there are any restrictions on overpaying your mortgage.
- When you don’t want to remortgage or switch mortgage lenders
Further advances are usually used to
- Finance home improvements
- To use as a deposit for a second home or property investment
If you intend to borrow for anything other than a home improvement or property investment then there will be better credit options suited to your needs.
You could get a peer to peer loan for loans. A peer to peer loan is where you borrow the money from another person with a third party in the middle to oversee the process.
If you are looking to get a car you could get car finance and you can also refinance an existing car finance you already have to get a cheaper total interest cost.
These options might not be always cheaper than a further advance especially if you have already figured out a repayment plan for your further advance. You will have to consider your individual circumstances when making this decision.
Further advances aren’t the only option, you can also remortgage to a new lender if the equity in your home has risen based on your home value or due to you making your monthly mortgage repayments.
Switching to a new lender is ideal when:
Yo will get offered a cheaper mortgage in total when all the mortgage fees are taking into account e.g early repayment fees or new mortgage arrangement fees
Ensure you inquire with a free digital broker so you have a full view of all your options before you agree on the option your mortgage lender has put in front of you.
Should you use your further advance to clear your debts?😱
Funding a home improvement or investing into a new property are things which can bring about a rise in value e.g a home improvement will increase the value of your house and a new property might be income generating or its value might naturally rise over the mortgage term due to factors such as location etc
Using your further advance to pay off your debts isn’t the greatest idea as further advances will usually accumulate a lot of interest throughout its term due to it being much longer than the terms on your debt. If you use a further advance to pay off your debts you are essentially borrowing money you couldn’t repay again but just for longer. There is no rise in value and the total interest cost might be much more.
If you fail to keep up with the repayments of your further advance you could lose your property and this is the main reason why a further advance for debt payments is a bad idea.
Before considering this option you must look at other options to manage your debt. Our shake off debt plan caters for all these options.
- A debt consolidation is a good option to help you manage all your debts. It works by getting you one personal loan which has a cheaper total interest cost than all your current debts combined together. You will now have one monthly payment to make and you can decide to increase the repayment term(although this might increase the total interest cost as you are now paying over a longer period) or reduce the payment term which will increase your monthly repayments but ensures you clear the debt off as soon as possible.
- Debt consolidation loans aren’t the only options, you can also take out a 0% balance transfer credit card which will allow you to move your debt on to the card for a fixed period( up to 12 months and more in some cases) and pay 0% interest. Thus might give you time to arrange your finances and get in a position to repay your debt.
- You could also consider using a debt repayment strategy such as the debt avalanche or the debt snowball to repay your debts. They work by either targeting the most expensive loan balance or the smallest balance.
Applying for a further advance🌳
Applying for a further advance is very similar to applying for a mortgage. The difference is your mortgage lender already had a relationship with you so things should move faster and you will likely have less documents to provide.
Your mortgage lender will still look into your mortgage affordability to see if you can afford the mortgage.
They will look at the same factors they inspected when you first took out the mortgage. This includes:
- Your income
- Your expenditure
- And Your credit score
- Your property value and your equity in the property
All these factors are important and will determine if you get a further advance or not
You can use our mortgage affordability calculator to see how likely you are to qualify for a further advance and what your monthly mortgage repayments will look like.
How to apply for a further advance👩💻
To apply for a further advance you should simply contact your mortgage lender and inquire about their further advance process, any further advance fees, any early repayment mortgage fees or mortgage overpayment fees, what their mortgage overpayment limit is per year and if you must borrow over the full term of the mortgage or you have flexibility to choose.
Your mortgage lender will then recommend a product to you but this product must be suitable to you.Your mortgage lender will not be obliged to show you suitable options outside of what they offer so you should seek independent financial advise from a mortgage broker.
If you are on a variable rate your mortgage lender will scrutinize your finances to ensure you will be able to keep up your mortgage repayments if they rise.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.You can also contact the debt charity “Step Change” if you are in debt and need help.