The difference between secured loans and remortgaging
With remortgaging, you are replacing your existing mortgage with a new one. You can either stay with your current mortgage provider or move to a new lender. There are several reasons why homeowners may want to do this, including:
- Their introductory mortgage offer has ended
- To find a better mortgage deal with more competitive rates or more flexible terms (like the ability to take payment holidays or make overpayments)
- To borrow extra money against their property (for example to consolidate debts or make home improvements)
If you get a homeowner loan, you’re borrowing additional funds on top of your existing mortgage - you are not replacing it. Common reasons for taking out a secured loan include:
Secured loans can have higher interest rates than mortgages. This is because, from the lender’s point of view, secured loans involve more risk. For example, if a house is repossessed or sold, then a mortgage is given priority over a secured loan, which means the funds are used to pay off the mortgage first.
On the other hand, you may end up paying more interest overall by remortgaging because the payments could be spread over a longer period of time. And increasing your borrowing in this way means it takes you longer to pay off your mortgage.
In both cases, the borrowing is secured against your property, so if you don’t maintain your repayments then you could risk your home being repossessed.
When is a secured loan better than remortgaging?
- You’ve had a change of circumstances since you got your mortgage. For example, you may find it easier to get a secured loan if you are now self-employed and you don’t have the proof of income that a mortgage provider needs.
- You need the money quickly. Although the timescale involved in taking out a secured loan does vary from lender to lender, it can often be quicker than getting a remortgage with additional borrowing.
- You face early repayment charges for remortgaging. This could potentially work out more expensive than taking out a secured loan
- You have a bad credit score. You may find it easier to get a secured loan than a remortgage if your credit score has reduced since you initially took your mortgage out. Certain lenders specialise in providing bad credit loans.
- Your mortgage lender won’t increase your borrowing against your property. You may be able to borrow more against your property with a secured loan instead
When is a secured loan cheaper than remortgaging?
Before you decide which option to go for, you need to weigh up the costs involved with each form of borrowing. In some circumstances, a secured loan can work out cheaper than remortgaging.
For example, an early repayment charge could be payable if you remortgage before your existing deal ends (depending on the terms and conditions of your agreement). Your current mortgage provider will be able to tell you how much they would charge if you decided to remortgage early. Make sure this fee isn’t more than the amount of money you’d save by switching to a lower interest rate. If it is, you may want to wait for your deal to end before you remortgage.
If your credit score has decreased since you took out your mortgage, you may find it difficult to remortgage, and you may be faced with higher interest rates than you currently enjoy. This is because the most competitive rates are usually reserved for those with the highest credit scores. And lenders could see you as more of a risk to lend to if you have a poor credit history.
You may find it easier to take out a secured loan than a mortgage if you have bad credit. And you would only pay a higher rate of interest on the additional amount you want to borrow, not the whole mortgage. The terms of your existing mortgage would stay the same, and you’d pay the secured loan on top.
As mentioned above, you may end up paying more interest overall by remortgaging because the payments are spread over an extended period. Also, if you don’t have much left to pay on your mortgage, you might find that the savings you’d make from remortgaging are too low to make it worthwhile.
Does a secured loan affect remortgaging?
It is possible to remortgage with a secured loan. You could look into borrowing more money with your new mortgage to pay off the loan. Then you will make only one payment each month to the lender. And the interest you are charged is likely to be lower than it would be on a secured loan. However, you may pay more interest in the long run because the payments are spread over a longer period.
Whether you are eligible for a remortgage depends on your circumstances and the lender’s criteria. They will want to carry out affordability checks to make sure you can meet the repayments now and in the future, especially if you want to borrow more money.
Alternatively, you could consider switching to a new mortgage and then keep paying the secured loan separately. However, not all mortgage providers allow this. It depends on the individual lender. So make sure you check if this is possible before you apply, to avoid complications further down the line.
Bear in mind that your secured loan will be taken into account when your lender calculates your affordability for a mortgage. This could affect the interest rate you’re offered and the deal you get.
How much can I borrow?
Whether you choose a secured loan or remortgage, the amount you can borrow depends on a number of factors, such as:
- your individual circumstances
- the lender’s criteria
- the value of your property (the higher, the better)
- and how much equity you have (the more, the better)
Equity is typically expressed as a monetary value or percentage that describes how much of your property you own outright after any debts secured against it (such as a mortgage or secured loan) are deducted from its current value. For example, if your house is worth £200,000 and you have an outstanding mortgage of £50,000, you will ‘own’ £150,000 or 75% equity in your home.
Lenders will carry out affordability checks to make sure you can afford the monthly repayments, both now and over the full term of the loan. They want to feel confident that you would be able to meet your repayments, even if your circumstances were to change (such as if interest rates rise or your income drops).
Secured loans typically start at £10,000. You can usually borrow more with a secured loan than a personal loan because the lenders have the added security of your property being used as collateral. This means they can repossess your property and claim back funds if you cannot afford the repayments.
With mortgages, you may be offered around four times your annual income. But remember, you don’t have to accept the amount you are offered. It is more important that you can afford to repay the loan over the long term, so you don’t end up in financial difficulty.
What happens if I move home?
If you move home, you will need to use the proceeds of the sale to pay off your existing mortgage and secured loan. Or you can transfer the balance to a new mortgage.
Are there any penalties for leaving your current lender?
As before, it’s important to check that there are no early repayment charges (ERCs) for leaving your lender before your existing mortgage deal ends.
These charges may change according to how long is left on the mortgage. For example, if five years are left on the mortgage, a 5% ERC may be imposed, while a mortgage with one year remaining may be subject to a 1% ERC. The exact rates or amounts charged, if any, depend on the lender.
For this reason, it is vital that if you are considering leaving your current provider, you look into these possible costs and factor them into your decision-making.
What to consider before taking out a secured loan
- How much you need to borrow and for how long
- What you can afford to borrow and repay back each month for the full term of the agreement. Bear in mind that borrowing more may mean your monthly repayments go up, so factor in any emergency costs that could crop up.
- Compare the total cost of borrowing (APRC) on different loans to find the best deal, including any fees, interest and charges. See how this compares to remortgaging.
- If you are going to consolidate your existing debts, you may be extending the term and increasing the amount you repay in total
- Check if you can improve your credit score to increase your chances of getting your application accepted at the most competitive rate
- Don’t make too many applications at once. Lenders carry out hard checks on your credit file every time you make a credit application, and too many applications within a short space of time could indicate that you are struggling financially. This could damage your chances of getting accepted.
- You can use an eligibility checker to find out the likelihood of acceptance before you apply. This won’t affect your credit score.
What to consider before remortgaging
- How much you need to borrow and for how long
- What you can afford to borrow and repay back each month for the full term of the agreement. Bear in mind that borrowing more may mean your monthly repayments go up and factor in any emergency costs that could crop up.
- Compare the cost of remortgaging to your current mortgage or a secured loan, including any interest, charges and early repayment charges. Will it cost you more than it will save?
- If you are going to consolidate your debts, calculate whether this will mean you are paying more interest in the long run by spreading the payments out
- Check if you can improve your credit score to increase your chances of getting your application accepted at the most competitive rate.
- Don’t apply for credit in the months leading up to your remortgage application. Lenders carry out hard checks on your credit file every time you make a credit application, and too many applications within a short space of time could indicate that you are struggling financially. This could damage your chances of getting accepted.
- You can use an eligibility checker to find out the likelihood of acceptance before you apply. This won’t affect your credit score.
In both cases, the borrowing is secured against your property, so if you don’t maintain your repayments, you could risk losing your home.
Read our helpful guides to learn more about loans.
Secured Loans from £10,000 to £500,000
- Check if you’re eligible before you apply
- We compare 100s of secured loans
- Getting a secured loan quote won’t affect your credit score
Secured loans are secured against your property.
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