If you’re keen to borrow money against the equity in your property and gain access to liquid funds, you have two main choices. You can take out a substantial loan secured against the home, or change mortgage provider and start a new mortgage with a different lender.
Secured loans are arguably the easiest way for homeowners to release equity in a property.
Remortgaging can be a strong option if you’re coming to the end of a fixed rate mortgage term. Rather than being moved onto a Standard Variable Rate (SVR), you could remortgage with a different mortgage lender and borrow a little more, keeping the interest rate down and avoiding any early repayment charges.
Deciding whether remortgaging or taking out a secured loan is the best solution for your financial needs in the short, medium- and long terms. This guide will help you reach a conclusion that ensures you understand all the implications of both approaches.
What is a remortgage?
Remortgaging involves moving your mortgage from one mortgage lender to another. You will start the mortgage application afresh when you look to remortgage, so only consider this action if you are prepared to undergo the full mortgage application process.
However, while remortgaging is not necessarily for the faint of heart, it can reap financial rewards. If your circumstances have changed since taking out your mortgage, you may find that a different lender will offer you a much better interest rate. Equally, you can theoretically borrow a larger sum than the property’s value, leaving you with money left over to use as you see fit.
What is a secured loan?
A secured loan is a line of credit taken out through a specialist lender, secured against your property. This is important to note, as your home will be at risk if you fail to keep up with scheduled repayments.
Naturally, though, this level of risk also comes with a reward. Secured loans are popular as they can be used for almost any purpose and typically attract much lower interest rates than unsecured loans.
Secured loans can run for as long as 30 years, depending on how much you borrow and your age at the point that you take out the loan. This makes them an affordable way to access funds without changing your mortgage agreement. It is important to understand how to get a secured loan.
What are the benefits of secured loans vs remortgaging?
Whether a secured loan or remortgage is your best course of action depends on various unique factors. It’s always advisable to seek the input of a reputable broker, who can review your circumstances and make recommendations that suit your needs.
You can still do a little research of your own, though. Let’s discuss some primary pros and cons of secured loans and remortgaging, respectively.
Secured loan advantages
Some of the benefits of taking out a secured loan include the following.
Secured loans will not immediately change your mortgage contract
If you have managed to arrange an appealing fixed rate on your mortgage, you may not be keen to lose out on this. Equally, if you are in the early days of a mortgage term, attempting to remortgage may cost you a substantial sum in exit fees.
Taking out a secured loan will not impact your mortgage arrangements. Your contract with your existing mortgage lender will remain unchanged until the terms are scheduled for renegotiation.
You can take out a secured loan for almost any legal purpose.
Your lender will ask you why you are requesting a secured loan, but there are virtually no wrong answers. You can use this form of borrowing for home improvements, consolidating debts, investing in a business venture, buying a second home at auction or putting down a deposit, paying for a dream holiday, car, or wedding … the possibilities are endless.
Now, this does not mean that you can take out a secured loan for any reason – and if your lender does not feel that your reasons are acceptable, they may refuse your application.
Secured loans are less dependent on credit score
Anybody who has experienced financial hardship will know how quickly things can spiral out of control. Unfortunately, if you have struggled for money in the past, your credit score can take up to six years to fully recover.
Late or missed card payments or exceeding lines of credit will damage your score. Defaults, CCJs and IVAs can do significant harm.
A lower credit score can make it increasingly difficult to be accepted for future borrowing – especially mortgages. You may need to approach specialist lenders, who will apply higher interest rates than you would like. As a secured loan offers equity in your home in collateral, lenders are likelier to be forgiving of past credit discrepancies – within reason.
Secured loans can also eventually build your credit score. If you regularly make your repayments on time, you will earn a reputation as a reliable borrower, and by using a secured loan to consolidate unsecured debt, your utilisation score will rise as you no longer rely on multiple lines of credit.
Secured loans allow for larger borrowing
Most secured loan providers will allow you to borrow at least 70% of the total equity in your home – some will allow up to 95%. This means that you can potentially gain access to funding with lower costs than would be possible with a personal loan.
Secured loan disadvantages
Naturally, every benefit also has a drawback. Be aware of these concerns when taking out a secured loan.
Secured loans are rarely available directly to the general public
It’s very difficult – almost impossible – to gain access to a secured loan without the services of a secured loan broker. You’ll need to partner up with an appropriate financial adviser, who will charge a fee for their services.
Many brokers will charge a percentage of the loan as their fee – often as high as 12.5%. This means you could add £5,000 to your loan if you borrow £40,000.
One way around this is to arrange a secured loan through ABC Finance. Unlike other secured loan brokers, we charge a flat rate fee regardless of how much you borrow – and that’s set at a hugely competitive £1,495.
You could lose your home
There is no getting away from the most considerable risk of any line of secured borrowing. Just as a mortgage lender can repossess your home if you fail to make repayments, a secured loan leaves you at risk of losing your property if you cannot meet your financial obligations.
If you miss multiple payments, your lender can take you to court. If a ruling goes in favour of the lender – which it likely will if you have breached your contractual agreement – you can be forced to sell your home. You will need to settle your outstanding debt and close your loan account with the lender using the equity. Failure to do so will result in repossession. You will also have a significant hit on your credit report, making it harder to get a mortgage for a new home.
This is not the outcome lenders want – it’s considerably more cost-effective and ethical to simply work with a customer to ensure repayments are made. No lender will write off secured debt, though, so only take out such a loan if you’re sure you can keep up with repayments.
You’ll probably need to repay the loan if you want to move house
If you take out a secured loan against your property, you are likely tying yourself to that home until the loan is repaid – unless you’re happy to use any proceeds from a sale to repay the loan balance.
You may be able to move the loan over to another home, but not all lenders allow this – and some mortgage lenders will be reluctant to take on customers looking to burden their asset with an additional loan.
So, this leaves you with three options. You can either stay put until the loan is fully paid off; find another way to pay the loan; or sell your home, settle your account, and put what is left toward a new property. Each approach has limitations, and if you choose to pay off the balance early, you may accrue more expenses than anticipated.
Secured loans come with multiple additional fees
When you take out a secured loan, you will be responsible for more than just the balance you borrowed. Interest will obviously be payable every month, and you’ll also face a range of additional fees. These include:
- A set-up fee is levied by the lender, which could be up to 5% of the total sum borrowed.
- Any out-of-pocket fees incurred by the lender, such as valuations of your property.
- An early exit fee if you wish to pay off the loan before the end of the term. This could be a percentage of the outstanding balance of a few months of interest.
Add these expenses to your broker fee, and you could be looking at some quite substantial costs.
There are a handful of reasons to seriously consider remortgaging your home. You’ll potentially gain access to these perks if you do so.
It’s a clean slate with a new lender
Familiarity can sometimes breed contempt, and if you’re not careful, this will apply to your relationship with a mortgage lender. Many businesses pay more attention to attracting new customers than keeping an existing client base happy.
If you have experienced financial difficulty with a lender in the past or feel that you have not been fairly treated for any reason, you can start over with a new mortgage lender that carries no baggage.
You may get a better deal
One of the biggest reasons to remortgage your property with a different lender is to get a better deal. Examples of this could include:
- Lower interest rates than your current provider is willing or able to offer.
- A longer repayment term with smaller monthly repayments.
- Switching to a fixed rate that offers peace of mind, rather than being on a Standard Variable Rate.
- Changing from a repayment mortgage to an interest-only mortgage.
You can potentially borrow more money
Remortgages can allow you to release equity from your property, raising more than your current mortgage balance.
Explain why you are looking for this extra money – and be honest! When it comes to remortgaging, your application is likelier to be accepted if your additional funds will be spent on the house, such as building an extension or undertaking structural improvements. This will protect and potentially enhance the value of the lender’s asset.
Remortgaging is not a decision to take lightly. Before you commit to this course of action, ensure you understand the risks and drawbacks. These include the following.
Mortgages are harder to obtain than secured loans
As discussed previously, they are typically offered more on a secured loan affordability basis than one inspired by your credit score. Mortgages will still take your credit history under significant consideration.
You have nothing to worry about if your score is rated Good or Excellent. You’ll likely find that any lender is happy to vie for your business and offer you an attractive interest rate. If your credit score is Poor or Fair, you may find that some lenders refuse to work with you, and those that do charge higher interest rates.
Mortgage lenders are typically more risk-averse than secured loan lenders. If you are self-employed, for example, you may struggle to convince a mortgage lender to work with you unless you can provide evidence of savings and contingency plans for maintaining your monthly repayments. As a rule, mortgage lenders feel much happier when customers have a steady, reliable, and consistent income stream.
Leaving a mortgage early can result in financial penalties
Much like a secured loan will attract an early repayment charge, so will a mortgage. If you look to terminate a mortgage agreement that has several years to run, you could be liable for a hefty repayment fee.
Add this repayment penalty to your legal fees for remortgaging, in addition to any funds due to a mortgage broker that found you the best deal possible, and you’ll owe quite a substantial sum on top of what you are borrowing.
When is a secured loan better than remortgaging?
Most borrowers will find a secured loan more aligned with their needs than remortgaging. Circumstances where this will come into play include:
- Your financial position has changed since you took out a mortgage (such as becoming self-employed or having encountered financial difficulty), making a remortgage harder to obtain.
- You still have several years left on your mortgage term, which will lead to a substantial exit fee.
- You are keen to avoid the expense and complication of the conveyancing process.
- Your mortgage lender refuses to allow you to borrow more against your home but will permit you to take out a secured loan through a third party.
When is a remortgage better than a secured loan?
If the following circumstances apply, consider remortgaging rather than taking out a secured loan.
- You are coming to the end of a mortgage term and wish to renegotiate a better interest rate.
- You have an excellent credit score and will likely secure a great mortgage deal.
- You have a strong relationship with your existing mortgage lender and prefer to investigate a product transfer that maintains your current interest rate.
- You expect to come into money soon and could take out an interest-only mortgage over a shorter repayment period, avoiding several years of interest payments.
Is a remortgage or secured loan cheaper?
Both remortgaging and taking out a secured loan will attract expenses and costs. Overall, though, a secured loan will usually cost less if you’re currently in a fixed rate period. You will not need to pay any early exit fees from your existing mortgage arrangement, and there is no need to involve a conveyancing team from a firm of solicitors.