If you’re looking to raise funds for home improvements or make a large purchase or investment, you might find yourself stuck between two options – taking out a secured loan or remortgaging. Which option is right for you will depend on your personal situation and your affordability. Whether you choose a secured loan or a remortgage, both options are secured against your property which means you could lose your home if you don’t keep up with the monthly repayments.
In this guide we’ll explain the differences between a secured loan and a remortgage so you can have a better understanding of your options and feel more confident in your decision.
What’s the difference between a secured loan and a remortgage?
It’s simple, remortgaging means replacing your existing mortgage with a new one. And getting a secured loan (also known as a homeowner loan) means taking out a second loan on top of your existing mortgage.
With remortgaging, you have the option to stay with your current mortgage provider or move to a new one. There are a few reasons why a homeowner might choose this option:
- Your introductory mortgage offer has ended.
- You are looking for a better mortgage deal with more competitive rates or flexible terms.
- To borrow more money against your property for things like debt consolidation or renovations.
With a secured loan, you borrow more money on top of your existing mortgage rather than replace it. You might want to do this for the following reasons:
- Debt consolidation
- Home improvements
A secured loan might have a higher interest rate than a remortgage. The reason for this is that the secured loan involves more risk from the lender’s perspective. If your property is repossessed or sold, the funds are used to pay off the mortgage before the secured loan, giving the mortgage priority.
Remember: Both options involve using your home as collateral. If you don’t meet your repayments, you could risk losing your home!
When is a secured loan better than a remortgage?
Depending on your situation, a secured loan might be the best option for you. Here are a few scenarios in which a secured loan would suit you better than a remortgage:
Self-employment
You’ve recently become self-employed or have a variable income and don’t have the proof of income needed for a remortgage.
Quick cash
You need to raise funds quickly. Timeframes for taking out a secured loan will differ from lender to lender but it is generally faster than remortgaging.
ERCs
You would have to pay high early repayment charges (ERC) to remortgage.
High LTV
Your loan-to-value ratio is the ratio of the value of the home you want to buy or remortgage and the loan you’ll need to do so. A high LTV means higher interest rates.
Bad credit
If you have bad credit, it won’t necessarily stop you from raising funds through either option, but it might be easier to get a secured loan rather than remortgage.
Great mortgage rate
If you have a mortgage at a highly competitive rate, it might not be worth sacrificing it and a secured loan is the safer option.
Interest-only
If you want an interest-only loan, it might be harder to find with a remortgage than with a secured loan.
When is a remortgage better than a secured loan?
There are situations in which remortgaging is a better option than taking out a secured loan.
End of mortgage term
If you’ve reached the end of your mortgage term, you don’t have any early repayment charges to pay.
Better rate
Your mortgage broker has found a better mortgage rate that would offset the cost of paying your early repayment charge over time.
Borrowing a large sum
If you need to borrow a rather large amount of money and pay it off over a longer repayment period, a remortgage will let you do that.
One credit agreement at a time
If the idea of paying a mortgage and a secured loan at the same time fills you with dread, you might want to stick with remortgaging and focus on the one loan.
Things to consider before getting a secured loan
By now, you might be leaning towards the secured loan. Maybe your early repayment charges are too high, or you need a lump sum of cash, quickly. Whatever the reason, there are a few more things to think about before you make your decision, such as:
- How much you need to borrow and how long it will take you to pay it off.
- How much you can realistically afford to borrow and repay each month. This is especially important if your loan has a variable interest rate – could you still afford your repayments if your interest rate were to suddenly increase?
- What your credit score looks like. If you can do anything to improve it before applying for a secured loan, this may increase your chances of getting your application accepted at a good rate.
- Making too many applications at once. Lenders carry out hard checks on your credit file every time you apply so too many applications within a short period of time could lead them to believe you’re having financial troubles which can affect your chances of getting accepted.
- The total cost of borrowing including fees, interest rates, and charges.
Things to consider before remortgaging
On the other hand, if you have found a competitive new rate or prefer to focus on the one loan and think remortgaging is the right choice for you, make sure you have considered the following before coming to a final decision.
- How much you need to borrow and how long it will take you to pay it off.
- How much you can realistically afford to borrow and repay each month. This is especially important if your remortgage has a variable interest rate – could you still afford your repayments if your interest rate were to increase suddenly?
- What your credit score looks like. If you can do anything to improve it before remortgaging, this could increase your chances of getting a good rate.
- Have you applied for credit recently? Lenders carry out hard checks on your credit file whenever you make a credit application, so too many within a short period of time could affect your chances of your remortgage application getting accepted.
- How the cost of remortgaging compares to your current mortgage, including interest and early repayment charges. Is it still worth it?
Does a secured loan affect remortgaging?
Yes, a secured loan might affect your chances of remortgaging in the future. If you run into difficulty paying off a secured loan, this will affect your credit score and make you a riskier borrower in the eyes of the lender.
When a lender calculates your affordability for a mortgage, they will look at any secured loans you’ve taken out and this will affect the interest rate you’re offered. Some lenders also have a maximum loan-to-value ratio they will consider when you remortgage, so any loans taken out against your property will count against that maximum limit.
It’s important to do thorough research before taking out a secured loan and consider the effect it might have on your finances in future. If you’re unsure, speak to a mortgage expert for advice.
If you need to borrow a large sum of money over a long period of time and don’t have any high early repayment charges to worry about, remortgaging might be the best option for you. But if you need to release funds quickly and hold on to your current mortgage rate, a secured loan is a good alternative. If you still don’t know which option is better for you in the long run, speak to a mortgage adviser. At The Mortgage Hut, we help you understand your requirements and give you more confidence in your decision.
FAQs
Frequently Asked
If you sell your home, you will need to pay off your existing mortgage or secured loan with the proceeds of the sale.
Frequently Asked
If you remortgage you might face paying early repayment charges for leaving before the end of your mortgage term, but the charges can change depending on how long is left on your mortgage. This is important to check before deciding to apply for a remortgage.
Frequently Asked
A secured loan might be cheaper than remortgaging if your credit score has gone down since you took out your mortgage. Applying for a mortgage with low credit could mean higher interest rates, possibly making a secured loan cheaper for you in the long run.
