Remortgaging vs getting a secured loan

Posted 15 April 2016 by Nick Parkhouse

If you're hoping to use the capital in your property to generate some funds, is it better to re-mortgage completely or to take out a separate loan?

If you want to borrow additional money secured on a property then you generally have two options. You can either remortgage - switch your mortgage to another lender and borrow extra cash in the process - or you can keep your current mortgage and take out a secured loan with your own or another lender. Our guide looks at these two options and outlines the pros and cons of each.

Remortgaging can help you to save money

A secured loan is a way of raising cash against the value of a property. The lender takes a legal charge over the property in order to protect their money, but this charge is generally secondary to your main mortgage lender, who has first call on any equity if you don't keep up your repayments.

As these 'second charge' loans represent an increased risk to a lender, the rates you pay on them are generally higher. This means that a remortgage will generally mean you benefit from lower interest rates and lower repayments on the debt.

Most lenders also offer some sort of incentive to help with the costs of a remortgage - for example, a free valuation or free legal fees. What this means is that if you are looking for the most competitive rate and the lowest payments, a remortgage will generally offer a better deal than a secured loan.

A remortgage may also be simpler as you will have one debt with one lender and one repayment, rather than two separate charges and two direct debits.

When a secured loan may be better than a remortgage

Considering that a secured loan will generally be more expensive than a remortgage, why would you choose this option? There are several reasons.

Firstly, you may be on a long-term fixed or variable rate with your current lender. If you are benefiting from a very low-rate deal - for example, five- or ten-year fixed rate - you may not want to give up the benefit of this product. In addition, you may have significant early repayment charges for coming out of the deal with your current lender.

A secured loan allows you to continue benefiting from a low rate and you'll avoid any early repayment charges.

A secured loan may also be a good option if your circumstances have changed since you took out your original mortgage. For example, you may have become self-employed, your income may have fallen or your credit rating may not be as good as it was before.

In these situations, getting a mortgage with a new lender might be difficult. However, underwriting on a secured loan can often be more flexible and there are specialist lenders who may be more sympathetic to your particular circumstances.

You may also find that a secured loan will let you borrow a higher percentage of your property value. While many good remortgage deals restrict lending to 80% or even 90% loan-to-value, a secured loan may allow you to borrow more.

Finally, while the monthly repayments on a remortgage will generally be lower than with a secured loan, the total amount you pay back may be higher. If you take your borrowing over a longer period of time - perhaps 15 or 20 years through a mortgage - you could end up paying back more interest in total than taking a secured loan at a higher rate over a shorter term.

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