Using your current home to raise capital
However hard we save and however much we plan there will always be occasions when you may want to raise additional capital. If you have a poor credit history you could find that the options open to you are limited, as lenders are reluctant to lend to you, even if you have now got your financial affairs back on track.
If you are already a homeowner you may be wondering whether you can use your property to raise funds. At Simply Adverse we often work with people who ask us how they can release the equity in their homes. Here we take a look at some of the reasons why you may want to access some extra cash, and discuss why a second charge mortgage could provide a suitable way to do so.
What Do You Need Money For?
Improving or renovating your home
Increasingly homeowners are deciding that in the current economic climate they would rather improve their current home than move into a new property. Making home improvements, from redecoration to complete renovations, not only improves your home while you live in it, it also adds value to the property if you decide to sell in the future.
Some renovations, such as fitting double glazing or improving cavity wall or loft insulation, can also reduce the running costs of your home by bringing down your heating costs. While there is some help available for homeowners making improvements to their home with a view to save energy, these are only offered by some energy providers and require applicants to be in receipt of at least one of a number of qualifying benefits.
In general, most homeowners considering major home improvements or renovations will be looking to approach a bank or other lender for a home improvement loan. However, for borrowers with a poor credit history a personal loan may not be available and other sources of finance will need to be investigated. A second charge mortgage could allow you to make the improvements you want to make on your property.
Investing in a new or established business
There are almost 6 million small and medium sized businesses in the UK, with many people seeing starting their own business as a solution to insecurity and unpredictability in the current job market. Starting a business if you have a poor credit history can be a challenge though, as it may be difficult to access a business loan for start-up costs.
Similarly, if you already run your own business and are seeking to expand, you may find that a history of adverse credit is a barrier to accessing additional funds. Loans for the self-employed with bad credit may attract higher interest rates if they are available at all, and so you may need to think about alternative ways to raise capital for your business. If you are a homeowner you may want to consider a second charge mortgage as a way to raise the funds you need.
Raising money for school fees
Investing in your children’s future is one of the most important investments you may ever make. If you are thinking about private education for them, you’ll be fully aware of how costly it can be. Depending on the school, fees cost on average £17,000 per academic year, and they tend to rise over time.
Releasing some of the equity in your home, via a second charge mortgage, could allow you to access some or all of the funds required to meet the cost of school fees.
If you have a poor credit history it’s also possible that you have run up a significant amount of debt, across a number of lenders. These could be previous loans, or credit card debts. Whatever form this debt takes, when it is owed to different lenders it can feel hard to manage and to keep track of.
Consolidating your debt, that is taking all your outstanding debts and combining them into one, single loan, can help you to manage your debt more efficiently. Again, you may find that the vicious circle of bad credit comes into play, the point at which you need to access funds may be the point at which it is precisely the most difficult. Some loan companies are unwilling to lend people with a poor credit history, and if they do interest rates may be particularly high to reflect the perceived greater risk.
A second charge mortgage on your current home could be a way to consolidate your debt relatively easily. However, there are some caveats, and as with all these decisions professional advice should be sought.
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How Can Homeowners Use Their Property To Raise Capital?
We’ve outlined some of the reasons that you may need to raise additional capital. In all these cases there are a number of ways that you could attempt to borrow funds. However, as you’ve seen, having a poor credit history may mean that the financial options available to others, may not be available to you.
As a homeowner you have a significant asset in the shape of your property, and you may then want to investigate how you can leverage this asset to raise funds. There is more than on way to do this although your circumstances may prevent you from taking full advantage of them. You may consider approaching your current lender to extend you mortgage. However there are a number of reasons why your current lender may not approve a further advance.
These reasons include:-
- Your lender may not offer further advance products to any borrower
- If your adverse credit post-dates the completion of your current mortgage, you may no longer meet your lender’s credit scoring requirements
- You may have too much unsecured debt for your current lender to extend your mortgage commitment
- The additional funds you are requesting may put the overall lending on your mortgage outside of a loan to value bracket based upon loan to value limits or automated property valuation
- Your current mortgage is interest only or an older product which does not allow advances
Another option could be remortgaging. We’ve discussed the relative advantages of remortgaging vs a second charge mortgage elsewhere, but a key barrier for someone with recent adverse credit is that it can be difficult to retain mortgage terms that are as competitive as your current terms. In addition, most lenders will not let you remortgage your residential property if the purpose for remortgage is to invest in a business
Could A Second Charge Mortgage Be The Solution?
A second charge mortgage could indeed be a solution for you if you are trying to raise capital with bad credit. A second charge mortgage allows you to release some of the equity in your home.
If you remortgage you may lose the benefits of your current mortgage, for example a low interest rate, while a second mortgage lets you release some of the equity in your home without losing these benefits. You can also release equity without triggering any early redemption penalty that your current lender has put in place.
As also mentioned, if your credit profile has significantly worsened a second charge mortgage may be the most appropriate option for you. This is because second charge lenders’ may be more sympathetic to your circumstances.
In a similar vein, second charge lenders may be more flexible when it comes to releasing funds for a business investment.
When considering a second charge mortgage it is vital that you speak to a mortgage broker who is experienced in both first and second charge mortgages. This will allow them to fully evaluate your circumstances and determine the most appropriate product for you.
At Simply Adverse our brokers have experience in working with lenders who provide all types of mortgage, including second charge mortgages and remortgages. If you are looking at how you can use your property to raise capital then talk to us today to discuss your options.
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