D6.03: FURTHER ADVANCES

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1 D6.03: FURTHER ADVANCES SYLLABUS Further advances Drawdown loans Home improvement loans Second charges Charge priority Tacking Bridging loans Legal implications Survey requirements Costs Debt consolidation Further advances A further advance is simply an additional loan from an existing mortgage lender to an existing borrower, secured on the same property This can be attractive business for a lender because of the practical experience they already have of the borrower s repayment record For the borrower, obtaining a further advance can be simpler than applying for credit from a new lender with whom they have no track record However, when loans are readily available in the market place, lenders need to keep their terms keen in order to gain this business Further advances are regulated by the FSA in the same way as other mortgages The ability of the borrower to repay and the value of the security need to be assessed, though the lender already has some of the necessary information However, as well as the borrower s track record, the lender will want to take account of any changes in circumstances since details were last obtained These could include a change in source or amount of income, increased total borrowings, an enlarged family, marriage, divorce etc A consent for mortgage form may be required from new residents (generally if aged 17 or more) in the property In some cases, it may be appropriate for a joint mortgage to replace a mortgage in the name of a sole borrower at the same time as the further advance A further valuation will often be undertaken and will be at the borrower s expense there is no guarantee that the property concerned will have increased in value, or even maintained its value, irrespective of market conditions In some cases, a higher lending charge may be applied if the new loan to value ratio is high as a result of the further advance, whether or not such a charge was made for the original loan The lender may also require some changes to the terms of the mortgage in order to agree a further advance All parties to the mortgage deed will need to agree to the further advance

2 This would include the guarantor where there is one for the original borrowing Drawdown loans With a drawdown loan, as well as agreeing to the advance the borrower requires, the lender specifies a maximum loan level which can be taken The borrower is then free to draw this down as and when (and if) they choose The maximum will reflect the value of the property used as security as well as the borrower s ability to service the loan These facilities will be available only if the value of the security initially exceeds the amount of the loan required by a substantial margin so that the loan to asset ratio is relatively low The further amounts are then available without having to go through another application process and without enquiry as to loan purpose (the further amount is treated as part of the original loan rather than as a further advance) Generally this also means that there will be no further valuation or legal fees However, if used for relatively short term purposes such as paying for a holiday or even a new car, the borrower needs to consider the fact that the loan period and therefore the interest paying period is usually long Home improvement loans It is always important (and indeed a legal requirement) to establish the purpose of a further advance Generally loans are regulated under the Consumer Credit Act if not for an exempt purpose (such as the purchase of the borrower s main residence) If a further advance is for the improvement, enlargement, alteration or repair of the borrower s main residence, and is from the same lender as the original mortgage, the loan is also exempt from being a regulated loan under the Consumer Credit Act Alternative loans are often offered by specialist second charge lenders through companies carrying out improvements such as double glazing or extensions However, the interest rate on these is likely to be higher than could be obtained with a further advance from the first mortgage lender In the past, regulated loans were limited to those not exceeding 25,000, but this limitation has now been removed Second charges If a top-up loan is obtained from a lender other than the original mortgage lender, but the original loan is not replaced, the lender will often take a second charge (ie a second mortgage) over the property The lender will assess the suitability of the borrower in the same way as for any other loan, and may also require a valuation of the property The lender may obtain information from the first charge lender, or may require copies of mortgage statements to check that the loan has been serviced in accordance with its terms A second charge gives the lender less security than a first charge This is simply because the debt to the holder of the first charge is satisfied from the sale proceeds first in the event of default, repossession and sale A second charge is a piusne (pronounced puny ) mortgage ie one which is not supported by the lender holding the title deeds (these are held by the first charge lender)

3 Interest rates for loans secured by a second charge are likely to be greater than for those secured by a first charge because of the greater risk to the lender Third, fourth etc charges can also occur, but are less common because they give the lender lower and lower levels of real protection A lender may therefore prefer simply to offer an unsecured loan instead Charge priority The priority of charges on a property is determined by the date the charges are registered with the Land Registry (not the date the loans are advanced) It is therefore important for a lender to register a charge as soon as possible Tacking Tacking is adding a further loan to an existing one and postponing a second (or subsequent) charge even though the second charge has been registered before the further loan Postponing the second charge means allowing the further loan to take precedence Generally the agreement of the lender with the second charge would be necessary (and may not be forthcoming because it lessens the security available to them) However, if the second lender will not agree, the risk from their point of view is that the whole of the borrowing will be replaced with a larger loan from the first lender However, in the case of a drawdown loan where the original lender is obliged to make further advances up to a limit, these further advances are treated as part of the first charge If the lender is not obliged to make further advances, any further loans are subject to normal rules and priority is determined by the date of registration unless the second charge lender agrees to postpone the second charge Bridging loans A bridging loan may be required by an individual who moves home, but buys his new property before completing the sale of his old property Open bridging loans are those where there is no set date for completion of the sale of the old property The degree of risk for the lender is high because it may be uncertain whether a sale can be agreed at an appropriate price within a reasonable timescale In the meantime, the borrower may be stretched financially because he is servicing two mortgages and could get into financial difficulties These could be exacerbated if the result is having to accept a low forced sale price for the old property Closed bridging involves less risk because it applies when a completion date is known and is certain (ie contracts have been exchanged) and so the loan will be for a known period Bridging loans are most commonly offered by banks or specialist lenders although they are currently difficult to find Interest rates for bridging loans (particularly open bridging loans) are likely to be higher than for mortgages because of the increased risk to lenders In general, bridging loans tend to be an expensive form of borrowing, and because they often need to be secured, can also involve substantial fees and charges

4 Legal implications Legal work is not usually required for a further advance because the mortgage deed will normally contain provisions which allow for further advances This is known as a further advances clause However, the legal implications of the further advance are the same as for the original mortgage In particular, the borrower must be made aware that the property can be repossessed if he defaults on repayments The risk of default is clearly increased if the loan and therefore the payments increase The inclusion of a further advances clause reduces the legal formalities required in order for a further advance to be taken but it does not commit the lender to make such an advance available The borrower is not committed to take a further advance either Survey requirements Lenders always assess the adequacy of the security offered Sometimes this will mean a new valuation survey, but this is not always required If the loan to value ratio is undemanding and the original valuation is relatively recent, the lender may take the view that the adequacy of the security is already clear Costs Where there are costs associated with a further advance, they will generally be borne by the borrower This includes, where relevant, both legal costs and valuation costs Stamp Duty Land Tax (SDLT) does not apply because there is no conveyance of the property It is however possible that the lender may meet legal and valuation costs as part of a special offer to attract business of this sort There are generally no legal or valuation costs associated with extra amounts taken under a drawdown mortgage however Debt consolidation Borrowers may seek to consolidate existing short term debts and replace them with an increased mortgage The intention is usually to decrease the level of monthly outgoings For example, it can be attractive to replace credit card debts with a further advance which is likely to be at a considerably lower rate of interest Repayments can also be spread across the remaining mortgage term It is important to take account of the possible disadvantages, including the costs involved, which will include legal and possibly valuation fees The mortgage is secured on property, usually the borrower s home, and in the event of default, the home could be at risk of repossession The term of the mortgage may be long, and interest (albeit at a relatively low rate) will be payable on the amounts outstanding until they are repaid

5 A further point for the borrower to bear in mind is that, if, after the consolidation, the credit card loans (for example) build up again, the result may be a more serious, and more difficult to manage, debt situation