Remortgage, further advance or second charge compared

There are three methods by which you can obtain a loan secured on your home to finance improvements: you can remortgage for a higher amount, ask your present lender for a further advance, or arrange a second charge mortgage with another lender. The one that is best for you generally depends on two figures – your present interest rate compared with today's interest rates and the amount of any early repayment charge. All three of these loans are secured on your home so that if you are unable to repay it, your home is at risk, and this is general information only and should not be regarded as financial advice.

Further advance

As MoneyHelper points out, you can make further progress by obtaining an additional loan from your current mortgage lender, with the interest rate for this loan being based on its own rate and not on the rate of your main mortgage agreement. This is a suitable option when you are carrying out home improvements and your lender has a competitive advance rate, since you do not want to disrupt your main mortgage. You have to go through the full affordability checks once more and you must have sufficient equity in the property so that the lender will agree to lend against it.

Remortgage

Remortgaging involves exchanging your existing mortgage for a new one which is generally larger and is often obtained from a different lender. It is the usual course of action when your present mortgage agreement is coming to an end or when current market rates are lower than the rate at which you are currently paying.

At the middle stage the mathematics generally fails when it comes to the early repayment fee. You have to pay a percentage of the total amount you owe if you want to leave, after which all of your current borrowings are re priced at today's rates, not just the new amount.

Second charge

A second charge mortgage is a loan provided by a different lender from the one who gave you your original mortgage and is secured on your home after the first mortgage; in the event that the property is sold, the first lender is paid off before the second. According to MoneyHelper's guide on second mortgages, lenders will usually take into account up to about 75% of your equity, the interest rates are higher than those on a first mortgage, and the same affordability and stress-testing rules apply as do for a principal mortgage.

After a lender has made an offer, you have a reflection period of at least 7 days during which the offer is binding. Second charges become effective when your ERC is high or when your credit position has changed since you took your first mortgage and it would be expensive to reprice all the loans.

The numbers on a real decision

Say you need £40,000 for an extension. Your balance is £120,000, fixed at 2.1% until 2028, with a 4% ERC. Remortgaging the full £160,000 at around 4.5% means paying a £4,800 ERC and giving up the cheap fix: the extra 2.4 points on the existing £120,000 alone is £2,880 a year in interest before the ERC is counted.

Another advance leaves the 2.1% rate unchanged and only charges the £40,000 at the higher rate. A second charge results in a similar situation but at a higher rate, and mainly makes sense in the case where your lender refuses the advance.

Questions that expose the true cost

No matter which option you look at, you should ask each lender the same four questions: what the total amount to be repaid over the entire term of the loan will be, whether any arrangement or valuation fees apply, whether the new loan has to cover the full remaining term of your mortgage or if it can be paid back over a shorter period, and what the monthly payment will be if interest rates go up. A loan for improvement spread over 25 years can gradually double the cost of a kitchen, and a shorter term on the top-up portion is often the most inexpensive solution.

Start by getting the advance quote since it is the standard against which the other two options have to exceed it, and there is no cost involved in doing so. If the full remortgage proves to be the better choice, it will come with legal work, and at that point you can compare the remortgage conveyancing quotes with the rates you have obtained.