If you have a secured loan and you’re thinking of remortgaging, it is possible to do this. However, it’s something to think about carefully.
Let’s take a closer look.
What’s a secured loan?
To get a better understanding of remortgaging when you have a secured loan, it’s good to know exactly what a secured loan is. Also known as a second charge mortgage, it’s a loan that’s secured to your property to provide additional security to the lender.
It’s called second-charge because in the event that you stop paying your loan, your mortgage provider would be the first to get their money back if your property was repossessed. What’s left from the sale would then be used to clear your secured loan.
One reason to consider a secured loan is if you want to borrow money and secure it to your property but can’t remortgage. This might be because you’re in the middle of a mortgage deal and to leave this early would come with a high early repayment charge. Instead, you could take out a separate loan and secure this to your home.
Why would you then remortgage?
So, you made the decision to take out a secured loan rather than remortgage, why would you then remortgage?
Well, perhaps your mortgage deal has come to an end and you want to get a new one. Once your fixed or tracker mortgage deal has come to an end and you’re on your lender’s Standard Variable Rate, there’s unlikely to be a charge for switching to a new deal.
So, if you have a secured loan, what happens when you want to remortgage?
Clear the loan or keep it
When you have a secured loan attached to your property and you’re thinking of remortgaging, you have a choice – you can either borrow extra with your new mortgage to clear the loan, or you can simply switch to a new mortgage deal for the amount you have outstanding on your current one and keep the loan separate.
Let’s look at these options separately:
Clear the loan – If you’ve been in your home long enough that you’ve built up a sizable amount of equity and a good loan to value, you could use this to borrow more when you remortgage.
If you decide to remortgage and borrow enough through this to clear your secured loan, it will make your payments simpler. Instead of paying the loan and mortgage separately each month, you’ll make just one payment to one lender.
Another benefit is that the interest on your mortgage payments is likely to be far lower than it is on your secured loan payments. You’ll be making payments for longer, so you might ultimately pay more interest overall, but mortgages almost always come with a lower interest rate than other forms of borrowing.
"If you want to borrow more to clear your loan, you’ll need to afford the repayments"
However, when you remortgage, your lender – or a new lender if you plan to switch provider – will consider all the same things they did when you first applied. They’ll take into account your income and outgoings and also carry out a stress test.
So, if you want to borrow more in order to clear your loan, you’ll need to be certain that you can afford the repayments, which may be larger than what you’re currently paying. If you can’t, you may be turned down.
Keep the loan – You don’t have to pay off your loan when you remortgage, as you would if you moved house and had a secured loan. You can keep on paying off your secured loan and your mortgage separately if you prefer.
While this is possible, there may be some mortgage providers who are unwilling to lend to you if you already have a loan with another lender attached to your property. Make sure you’re upfront about the loan when you speak to lenders and find out what their stand is before you actually apply.
"Your secured loan repayment will be included in your outgoings"
And remember that your secured loan repayment will be included in your outgoings when your lender calculates how much you can afford to pay each month. This could have an impact on the interest rate you’re offered and the deal you get.
A final point to keep in mind is that your new mortgage provider may charge you extra if you remortgage and have a separate secured loan. This is because there is a little more legal legwork to go through, and while some providers may cover this, others will charge you. Ask the lender you apply to what their policy is.
We hope that’s answered any questions you had about remortgaging with a secured loan. For the answers to other common questions about property finances, come back soon.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.