Capital Raising - Frequently Asked Mortgage Questions

Using your equity to improve your home is one of many reasons people release capital.

See video transcript

Hi guys, Dan and Kye here again from Crescent Mortgages coming to you with one of our FAMQ's -  Frequently Asked Mortgage Questions and today's topic is going to be capital raising.

What this means is borrowing extra on top of your additional mortgage for a variety of purposes whether that's home improvements, consolidating debt or personal use - we're going to jump into it in a second, before we do just a reminder we are Cemap qualified mortgage and protection advisors practicing in the industry for a combined 20 years -  let's jump into it!

Okay, so capital raising.

I'm sure a lot of you are familiar with the term, some of you may have actually already done it but first of all what is it? Kye, what is capital raising capital raising?

It's raising capital... so capital raising is releasing additional mone, on a property that you already own, so generally involved within a remortgage and is borrowing more money for a purpose of some sort, that you would normally need to be specified. So for example if you had already had a mortgage, let's say you bought the house five years ago, you've currently got a mortgage of £100,000 on your property and you have equity in that property, which means that the value of the property is higher than the mortgage. So the difference is your equity, that's technically yours if you were to sell the property, that would be the money that you take out if you have equity in the property you can usually release that equity which is known as capital raising.

So if you had a mortgage of £100,000 and you wanted to borrow an extra £20, 000 for whatever reason, which we'll come to in a second, then by increasing your mortgage to £120,000 that would be capital raising and the additional £20,000 will be given to you, for whatever purpose you plan for it.

Why would you capital raise? I suppose is the next question isn't it?

Why would you? 

I guess any reason why you would need additional money - so the common ones I think that we can probably cover and then maybe touch on some of the slightly more difficult ones. 

Yeah so I'll first, we can go backwards and forwards. 

Oh this is good.

So I would say home improvements. 

That's a good one yeah, so any improvements to your home big or small, most common way people do it is to borrow a bit of money, especially if it's significant.
If you're building an extension, refurbing the whole place, loft conversion, that kind of thing, then actually you might need you know £20,000, £30,000, £40,000, £50,000 and actually it's quite difficult to find a bank loan for that amount and even if you do find a bank loan if it's over five years that's going to be quite a significant monthly payment, whereas if you wrap that into your mortgage then obviously that's going to be spread over your entire mortgage term, which often is 20-25 years, maybe longer, so actually because you're spreading that out it actually reduces the monthly payment and a lot of people don't feel that each month compared to a shorter shorter loan.

I gave quite a lot there actually and I actually avoided the question.

Yeah you did I thought we were going to kind of play tennis...

Yeah sorry about that. 

The next common one is debt consolidation - now we should add a disclaimer here that there is quite a lot more advice that we would need to give you regarding debt consolidation because actually consolidating and wrapping your short-term debt, such as your credit cards and loans into your mortgage, there are some risks and there are some downsides but providing it is right for you it is quite common for people to wrap up.

Let's say you've taken out several thousand pounds on a credit card, let's say you've taken out a few bank loans and maybe the monthly payments there are getting a bit a bit too much, you're not particularly comfortable with them, or you just want to bring it down to increase your disposable income, some people then will wrap that into their mortgage so borrow the additional £5,000 - £10,000, however much, to clear those debts and again you will notice then that that reduces your monthly outlay because you've spread the debt over longer term, normally than over the shorter terms that they usually allow for credit cards and loans.

That particular topic is probably a topic for a video in its own right, and I would say you have to talk to someone for that.

The next one I would say is to buy another property, maybe buying a rental property, buying a home down in the coast, I don't know buying somewhere else would be my next one.

Good point there and I guess the final one that comes up quite frequently is personal use. 

Now just quickly, the first three that we covered there, home improvements debt consolidation and purchasing another property, they're generally quite straightforward most lenders will do them normally, providing that you can evidence where the money is going, they're normally quite straightforward. Most lenders, that's kind of within their typical criteria.

Moving on to the next couple, it becomes a bit more specialist but not every lender will do it, so personal use whether that be buying a car, gifting money to a family member, you know purchasing anything else really, you know going on holiday, whatever you want to do with it.

Some lenders will allow that, however not every lender will and the reason being is it's very difficult for you to evidence where that money is going and they obviously do need to do their own kind of due diligence to make sure that the money's being used for a legal purpose, so it's a bit more difficult but there are lenders that that will do it.

Then you do get into some quirky ones - you might be trying to pay a a tax bill if you're self-employed you or inheritance tax, setting up a business and releasing funds for all sorts, and they get more difficult and you get more limited, but a lot of them are doable, subject to it being legal is normally the wording.

Any legal purpose is quite a common set of wording and you can normally find a solution if that's the case, but those 3 or 4 we mentioned are the ones that, if we were to write down, the ones we see it's probably those four on a common basis.

Business use is possible with some, but I would say you are far more limited than the others, so again if there are other limitations around your case as well as that, then you could start to find that you don't have a huge amount of options, but again you know if that's something you really want to do, run it past the broker and they can do the research to see if there are lenders that will lend to you.

I think that's kind of everything that I wanted to to cover.

Yeah I think we did cover how you would do it and I mentioned it normally is done by remortgaging and that might be through your existing lender which is often called a further advance, and they'll give you some extra borrowing on top of what you have or you would remortgage to a new lender and that new lender would release enough to pay off your mortgage, that you currently have.

I should say, alongside the additional money, all in one, but those are quite simply the two ways you do it.

Generally if you're coming to the end of your existing mortgage scheme, it's obviously quite frequent to do a remortgage to a new lender, if you're tied into your existing scheme then you should really consider if you're going to remortgage to a new lender because there'll usually be an early repayment charge to redeem your existing scheme, so do look into that, again your broker can look at that and give you advice but like I said further advance with your existing lender or a full remortgage to a new lender usually the two times when it's easiest to capital raise.

I think that covers everything from me, it's a relatively straightforward one but any questions obviously let us know, leave them in the comments or contact us through the description to head over to our website or give us a call and hopefully we'll hear from you soon.

Thanks a lot