Using the equity in your house to borrow more

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Using the equity in your house to borrow more

21st November 2009

So you need a new car, or a new kitchen or bathroom, or a conservatory extension on your house. What is the cheapest way to borrow for this sort of thing?

Let's imagine you have been living in your new house for several years and during this time its value increased by 30%. It's now worth 260,000 compared to the 165,000 you paid originally for it. The outstanding mortgage that you have (taking into account what you have already paid off with your mortgage repayments) is currently only 130,000. Now you have 130,000 of equity in the property, and if you increase the existing mortgage you can borrow against that added value. This is by far the cheapest way to borrow money for a large expenditure.

In these circumstances, your bank or building society lender will be happy to lend you more money, provided that you have kept on time with your mortgage repayments ever since you borrowed the initial mortgage. You should be able to get an increase on the same terms as your existing mortgage. If the lender will come to an agreement regarding this and you have past the early redemption penalty period, shop around for a new lender. You might find a financial adviser to be as helpful as with the original loan. There will be plenty of lenders around offering to begin a brand new mortgage for the whole of your existing outstanding mortgage plus the additional money you wish to borrow. You can probably start a new discounted variable rate period too. Take heed, however, if you are benefiting from a capped rate or fixed mortgage where standard variable rates are already above the capped or fixed rate which you are paying. In these circumstances it will be in your best interest to borrow the higher SVR rather than having to give up the benefit of your cap rate or fixed on what you owe already.

Before you switch from one lender to another for a better rate, check what legal costs, set-up fees, and valuation fees you may have to pay. There will be lenders that will negotiate on these in order to fight for your business. If you believe you have found the best deals you can for the up front charges and fees, ensure that they don't add up to more than any extra you will pay in interest over the period remaining on the loan if you stay with your current lender. Any seasoned financial adviser will be able to help you with the calculation.

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