In this brief guide, we are going to define what a mortgage advance is, how to get a mortgage advance and alternatives to getting a mortgage advance.
What is a mortgage advance?
A mortgage advance or further advance is when you take on further borrowing from your mortgage lender.
A mortgage advance will not necessarily be approved by your mortgage lender as you must still pass the mortgage affordability assessments and the mortgage advance may also not be on the same mortgage rate as your current mortgage.
It is more likely to be more expensive.
Not all mortgage lenders offer a mortgage advance and some mortgage lenders have a maximum amount on which they can borrow to each individual borrower.
How does a mortgage advance work?
A mortgage advance works like this: You borrow more money from your original mortgage lender. This additional borrowing is secured on your property and is usually done when your property has risen in value or you have repaid back a sufficient amount of your mortgage balance and now have much more equity in your property.
The mortgage advance rate will usually be at a different rate to your existing mortgage.
You will have to start repaying the mortgage as soon as you have received your mortgage advance.
Can you get a mortgage advance?
Yes, you may be able to get a mortgage advance but the main issue most people will be concerned with is if they can afford a mortgage advance.
Below we will look at some of the main points most mortgage lenders will look when considering if to give you a mortgage advance or not.
Good credit score
Have you got a good credit score? As you already know by now, most mortgage lenders prefer to lend to people who they know have good credit scores and have shown good repayment behaviour with oast credit.
Sufficient equity in your home
Do you have sufficient equity in your house? Without sufficient equity in your house, you may struggle to find a mortgage lender who is willing yo offer you a mortgage advance as most mortgage lenders will have their lending criteria which limits the loan to value rates they may be able to offer on mortgages.
This means if you do not have sufficient equity in your house then you may not be able to get a mortgage advance. You can use a house price calculator to see what your current house price is.
Subtract your outstanding mortgage balance and any other secured loans from this and you will get the amount of equity you have left in your home.
If the mortgage lender has a loan to value of 10% then you must expect to have at least 10% of the equity in your home after the mortgage advance has been loaned to you.
Ability to repay the mortgage
Another thing the mortgage lender will check for is if you have the ability to repay your mortgage with a mortgage advance.
A mortgage advance will increase your monthly mortgage repayment and you must be able to show that you will be able to afford these monthly mortgage repayments with your current income.
Getting a mortgage advance with bad credit
If you have bad credit then you may be wondering if you are able to get a mortgage advance with bad credit.
Yes, it may be possible to get a mortgage advance with bad credit but this depends on the type of bad credit you have and how long ago it happened.
Bad credit could include:
- County court judgements
- Home repossessions
- Debt management plans
- Individual voluntary arrangements
- Missed credit repayments
- Late credit repayments
- Mortgage default
Depending on how long ago this happened you may be able to get a mortgage advance. Most mortgage lenders will want to see at least 12 months of good credit behaviour since the incident occurred and most mortgage lenders will not lend to borrowers within 12 months of a bad credit market on their credit profile.
Alternatives to a mortgage advance
There are various alternatives which you may want to consider rather than a mortgage advance. We have listed a few of them below.
A secured loan
You could get a secured loan from a variety of mortgage lenders. A secured loan still shares various similarities with a mortgage advance. It is secured against your home and hence you will still need to meet some eligibility criteria.
Borrowing from family
If you are unable to find any funding source then you could borrow the funds you need from your family members or friends. In most cases, this could save you a lot of money but you should look to put in place a family loan agreement to avoid any issues down the road.
Getting a personal loan
You could also get a personal loan. A personal loan is an unsecured loan and as such, it is not secured on your property.
This, however, doesn’t mean you won’t lose your property if you default on a personal loan.
Personal loan rates are also known to be much higher due to the fact that they are unsecured.
Borrowing from your credit cards
Depending on the amount of further advance you want you could simply borrow from your credit cards.
You should note that credit card APRs could be very high and credit card debt is compounding which makes it very easy to build up and put you in a financial mess.
Remortgage to a new lender
If your current mortgage lender does not want to offer you a mortgage advance then you could simply remortgage to a new mortgage lender who will offer you the additional borrowing.
The risks of a mortgage advance
There are risks attached t getting a mortgage advance.
One of the big risks is that you could potentially lose your home if you default on your monthly mortgage repayments.
If you don’t lose your home you may also incur other bad credit markers such s missed credit repayments, late payments, county court judgements etc.
You should always be very careful when adding more debt on to your house and be sure you can afford to pay it.
Getting a mortgage advance on a buy to let mortgage
If you are considering getting a mortgage advance on a buy to let mortgage then the mortgage lender will want to see how you intend to repay the mortgage.
You will e ut through the mortgage lender’s affordability assessments and a key part of this will be your rental coverage.
Depending on the rental coverage the mortgage lender uses, your monthly rental income will need to cover your monthly mortgage repayments as well as have sufficient amount t cover for any defaults from your tenants or missed payments.
A rental coverage of 125% is very common but some buy to let mortgage lenders may insist on a higher rental coverage.
A mortgage advance will increase your monthly mortgage repayments and hence you will need to be able to cover your new monthly mortgage repayments and have enough left for any financial surprises.
If it doesn’t then you may need to look at other alternative sources of finance depending on what you need the additional borrowing for.
You could also speak to a buy to let mortgage broker who can find mortgage lenders who have smaller rental coverage demands.
Getting a mortgage advance as a self-employed borrower
Getting a mortgage advance as a self-employed borrower will remind you of many of the hurdles you had to climb when getting your initial mortgage.
As a self-employed borrower, there is a lot of scrutiny on your income and its reliability.
Mortgage lenders will also usually not take all of your income into consideration although there are a few mortgage lenders who will.
As a self-employed borrower, you will need to prove to the mortgage lender that you can afford to borrow the additional amount and you can keep up on your monthly mortgage repayments with no issues.
If you feel you will struggle to do this on your own or you want to explore other possible funding options aside from a mortgage advance then you can speak to a self-employed mortgage broker who may be able to assist you.
Getting a mortgage advance for an interest-only mortgage
Getting a mortgage advance for an interest-only mortgage is entirely possible but it will heavily depend on you being able to prove to the mortgage lender that you can afford the monthly mortgage repayments which will increase as the mortgage balance will increase.
More importantly, you will have to prove to the mortgage lender that you are able to repay the additional capital borrowed at the end of your mortgage term by using your capital repayment vehicle.
If you are not able to prove to the mortgage lender that you are able to repay the additional capital borrowed then you will not be approved for a further advance and you may be better off looking at other alternative sources of finance.
Use a mortgage calculator
You could use a mortgage calculator to see what further borrowing could cost you. Remember these figures are only for guidance and may not represent your through mortgage affordability.
Use a mortgage broker to analyse your mortgage options.
You may want to consider using an independent mortgage broker to get a mortgage.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
In this brief guide, we defined what a mortgage advance is, how to get a mortgage advance and alternatives to getting a mortgage advance.
If you have any questions or comments please let us know.