Ask the Expert: What options should I consider if I want to raise £20k?
Our Ask the Expert series of financial FAQs continues, discussing areas of personal finance.
Q: How can I raise £20k?
A: If you need to raise money for a project such as home improvements, a new car, a deposit for a house or a wedding, there are 7 main ways you can go about it. Different people may turn to different options, depending on their financial circumstances, such as if they own a property, and how much debt they currently have.
Let’s take a look at the different options available.
If you are fortunate enough to have easily accessible cash savings, using these may be the best option to fund such a large project. After all, you won’t pay any interest or fees on a loan, nor will you have to make regular monthly repayments until the loan has been repaid and in the current low interest environment the interest you are receiving on these savings is unlikely to be anywhere near the interest you will pay on a loan.
However, even if you have these funds available, you may still want to consider a loan. It will have taken you a long time to save up this money and it can provide you with cash to use in an emergency. If it is already spent it cannot provide you with this protection.
Family and Friends
Another alternative could be to borrow the money from parents, children, siblings or other family members. ‘Very’ good friends can also be an option (but lending or accepting £20,000 to a friend can be fraught with danger)
If this is an option available to you, you should consider it. Borrowing money from this source is likely to be cheaper and more flexible than a loan from a financial institution.
Moving now into borrowing money from banks, finance houses and other financial institutions, credit cards are a way that you could potentially borrow £20,000.
Credit Cards can be described as a flexible revolving credit line: that is, you can borrow and pay back and re-borrow as often you like up to an agreed spend limit.
The benefit of using a credit card is that you have the flexibility to increase and reduce your spending without having to apply and be approved for credit each time and that if you are making a large purchase you have extra legislative protection if the product is faulty or the workmanship shoddy. Many credit cards also offer 0% interest cards, which can be a good way to borrow for a short period of time.
To have a limit of £20,000 across one or a number of credit cards you will need to have an exemplary credit file and this option will be limited to only certain people. Also be aware that 0% interest rate does not last forever – typical rates outside this interest-free period are between 15 and 30%. This can end up being particularly painful for those who get into the trap of just paying the minimum amount off their credit card each month.
Finally please be aware of your own behaviour with credit cards because of the pre agreed limits and the lack of a fixed term to repay it is very easy to spend money you don’t really need to spend without any real plan as to how you will ultimately pay the money back.
Quick and relatively simple to arrange, an unsecond mortgage may be a great option for raising £20,000. Fees are likely to be low and the interest rate competitive. However, there can be some drawbacks.
Most lenders restrict the term of any loan, typically to 5 years, occasionally 7. Over such a short term, the repayments can be large if you are borrowing £20,000. You need to be confident that you can afford the repayments (and demonstrate this to the lender) before borrowing this way.
As an unsecond mortgage is not tied to any physical asset such as your house or car, the lender doesn’t have any “insurance” should you fail to make repayments. As such, it may be harder to get accepted for an unsecond mortgage, or the rate may be higher than with some other forms of finance. This is particularly true for a large amount of money such as £20,000. A loan of this size may be difficult to find unless you have an excellent credit rating.
If you are a homeowner and already have a mortgage, a further advance may be a sensible option for this type of borrowing.
A further advance is when you approach your existing mortgage lender for more money on top of the loan you already have.
In this case you ask for another £20,000. If the lender is prepared to lend you the money it may be at the same rate as the rest of your mortgage and repaid over the remaining term of your main mortgage. Alternatively it may be at a different rate and term.
The benefit of a further advance that the rate of interest is likely be low as the mortgage company will already know you. This may also speed up the process and, because the loan will be secured on your home, it can be repaid over a longer period, keeping the repayments down.
Whilst a further advance is an option that may be available to you, be aware that there may be fees and charges to pay up front to cover valuations or legal fees as well as the lenders costs of arranging the loan.
Remortgaging means moving your mortgage from one provider to another, in order to get the best deal. If you have “equity” in your property (the difference between it’s value & the loans secured against it) you may be able to borrow the extra £20,000 and move your total mortgage balance to a new mortgage lender. The benefit of raising £20,000 this way is that a remortgage will often attract the lowest rate of interest as the loan is secured against property, meaning the risk to the lender is lower.
Also the money can be taken over a longer term so the monthly payments relative to an unsecond mortgage can be lower.
The disadvantages of a remortgage will depend upon your circumstances. It can take a long time to complete a remortgage - the new lender will have valuations, legal searches and more documentation to collect from you. So if you are in a hurry to raise the funds this may not be the right route to take.
Also be aware that there may be upfront fees to pay the lender, to solicitors and to valuers.
Finally make sure you are aware and have factored in any fees payable to your current mortgage lender for settling your current mortgage balance early and switching it to another lender.
A second mortgage (sometimes known as a homeowner loan or a second mortgage) is a personal loan secured on your property.
The benefits of a second mortgage include the fact that you can often borrow larger sums than you can unsecured, at a lower rate of interest and over a longer term – meaning that repayments are relatively low.
Unlike mortgages, should you wish to repay early or make regular additional repayments, you can usually do so without significant penalties.
Whilst there will be fees to pay, second mortgages are often used as an alternative to a remortgage or further advance as there are no UPFRONT fees payable. Alternatively, where the borrower already has a competitive interest rate or is tied to their current mortgage product, a second mortgage will allow increased borrowing without raising the cost of the original loan.
However, exactly as with your first mortgage, should you continually fail to make the repayments, the lender can begin action to re-possess your home.
This is just an overview of the main types of credit on offer: depending on your circumstances you may only have a few of these or perhaps others, available. Remember to take the time to research the options available to you, in order to get a financial solution that matches your borrowing needs & circumstances.