There could be many reasons behind a requirement for a cash injection, and depending on your circumstances, raising capital on your home may be the first port of call.
This article will explore some of the options available for raising capital against property including discussing all of the necessary considerations.
What is a Capital Raising Mortgage?
The process of raising capital against a property usually involves remortgaging.
By taking out a re-mortgage, a homeowner swaps or changes their mortgage product to either benefit from better terms such as lower interest rates, or to increase the borrowing to enable a cash lump sum to be released which can be for a range of purposes such as paying for home improvements or to consolidate other debts. To generate cash, equity is released from the property.
This type of borrowing is a secured loan which means the property could be at risk if the repayments are not kept up.
Each lender will have criteria of which reasons that they will be prepared to accept a capital raising mortgage for however typically such mortgages can be used to raise finances for the following:
- New purchases – The funds raised could be used to buy a new car, pay for a family event such as a wedding or funeral or put a deposit on another property.
- Gifts – Capital raising mortgages could be arranged to fund gifts, for example, to enable a family member to get on the housing ladder.
- Debt consolidation – Most lender will allow capital raising mortgages to be used for paying off other debts such as personal loans or credit cards. The process of debt consolidation can streamline payments and save on interest; however, the repayments are often over longer with a mortgage rather than a personal loan for example.
- Investments – The funds raised could be used to fund investments such as a business expansion or the purchase of a buy to let property for example.
- Home Improvements – Funds raised by re-mortgaging can be used to undertake an array of home improvements from re-decorating to extensions.
Most lenders will not be prepared to offer a capital raising mortgage for:
- For the purchase of stocks and shares
- Funding a business start-up
- Repayment of debts escalated from gambling
- To repay tax bills
- Reasons for remortgaging.
- Remortgaging to release equity.
- Remortgaging to buy another property.
- Remortgaging with bad credit.
- Remortgaging for home improvements.
What is the process of remortgaging?
The re-mortgaging process is similar to that of applying for a standard mortgage, as the same information will be required to be reviewed by a lender such as:
- The financial position of the applicant, including a credit history check plus proof of current income and expenditure
- The value of the property that the proposed borrowing will be secured against
In addition, with a remortgage application, the lender will most likely request the purpose of the additional borrowing.
The underwriting process is also the same as with a standard mortgage, as following an application, the lender will review all of the information provided to check that the applicant and property meet the lending criteria.
A property valuation and survey will be undertaken during the application process and if the application is deemed successful, a mortgage offer can be issued.
How much can be borrowed when remortgaging?
Typically, capital raising re-mortgages will offer up to 75% of the property’s value, however, some lenders may be willing to increase their mortgage offer to 95% of the property’s value with a first charge mortgage.
A first charge mortgage is the first mortgage that has been charged against property and therefore would have the first priority before any other lending on the property.
First charge mortgages are common for residential borrowing however they can also apply to commercial property. Should any other lending be requested on a property, the first charge mortgage lender would need to grant permission.
There are a few mortgage lenders that may even offer 100% of the property’s value with a second charge.
A second charge mortgage is technically where there are two separate mortgages in place against one property.
A second mortgage application can be made even if the applicant does not reside in the property and can be useful should the requirement to obtain additional borrowing comes at a time when the applicant would face large early repayment penalties on the first mortgage.
Another example of when a second charge mortgage may be suitable is when the first mortgage is already on preferable terms and therefore by re-mortgaging in the traditional way would cost more by paying higher interest across the whole borrowing amount.
As already discussed, the permission of the first mortgage lender would be required in order to set up a second mortgage.
As with any borrowing, the value of the mortgage offered may be tailored to the personal circumstances of the applicant and therefore the percentages discussed are often the maximum a lender would offer.
All mortgage lenders apply affordability factors, reviewing an applicant’s level of income and expenditure to ensure that the loan can be comfortably repaid.
What are the costs of re-mortgaging?
There will be costs applicable to re-mortgaging such as mortgage application fees, arrangement fees, valuation fees and transaction fees, broker fees (if used) in addition to the interest payable.
Due to the potential costs, and the longevity of any mortgage decision, it is important to undertake sufficient research before applying for a re-mortgage, ensuring that it is the most cost-effective option to achieve the financial objective.
An independent mortgage adviser can help with the process of comparing different financial products, provide insight into the current market conditions including typical lending offers of certain lenders and ultimately find the best deal that suits the needs of the applicant.
Capital raising mortgages summary
Re-mortgaging is a method of generating a cash lump sum for an array of purposes, however, there are a number of factors to consider when looking into a re-mortgage such as finding the most appropriate financial product, comparisons with other financial options, plus the costs involved and the affordability of the repayments.
An independent mortgage adviser can provide assistance with reviewing your personal circumstances and advising the most appropriate financial solution whilst comparing the financial products available to find the best deal.
Call us today on 01925 906 210 or feel free to contact us. One of our advisors will be happy to talk through all of your options with you.