From 21st March, the Mortgage Credit Directive took effect. They are a new set of regulations including the need to disclose certain extra bits of information and highlight different risks. The major change from a mortgage advice point of view, comes when somebody is looking to remortgage and wish to raise money for another purpose, referred to as capital raising.
There always have been various alternatives to a remortgage when you wish to raise capital for projects such as home improvements or debt consolidation. You can ask for a further advance, meaning borrowing more money from your existing mortgage lender, which is then added to your main mortgage. You could obtain a personal loan, which isn’t secured on your home, but usually has a maximum term of around 5 to 7 years and there are restrictions on the amounts that you are able to borrow. Another option is a secured loan, or sometimes referred to as a second charge. This is where a different lender provides you with funds which are secured on your home, but whom in the event of you defaulting on your mortgage liabilities, rank behind your existing mortgage lender. This way you do not have to make any changes to your current mortgage.
Some of the advantages of a secured loan include that because you don’t have to move your original mortgage, you could benefit from the interest rate you currently have. Some borrowers currently have ultra low rates which they don’t want to lose. Another advantage is that you are able to borrow monies which you can stretch over a potentially longer term than you can with a personal loan. It should still be remembered that often if it is obtainable at decent rates, a further advance from your current lender will still be more suited.
The disadvantages include typically high fees for arrangement, increased ongoing administration for the borrower and restrictive issues that arise in the future.
As with a lot of financial products, it isn’t always about doing the figures and working out which one costs the most in pounds and pence. There are other factors that need to be considered. Although I will be and always have recommended second charge loans to some people, there needs to be a very good reason, and due to the problems that arise, that reason isn’t always just because it appears to work out at a better overall cost.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner