Secured Loan or Remortgage?

• Guides
• Published: 12 Aug 2008 in Money and General

When looking to use property as collateral to secure a loan, borrowers can opt for a basic secured loan type, or look to remortgage their existing borrowing. Obtaining a secured loan means offering your property as collateral. This gives the lender what is called a second charge on your property and means that should you default on the repayments in the future, the lender has your home as security. Remortgaging is the process of paying off your existing mortgage loan with the proceeds of a newly acquired mortgage loan.

The benefits and uses of each method for borrowing must be weighed against their associated risks and costs. A new secured loan is a way for a borrower to take advantage of existing equity in their home, or borrowing room left from a low debt to equity or debt to income ratio. As a property owner, offering security to the lender makes them more likely to offer better rates, repayment terms, and other product features that are beneficial to you.

Secured loans attract a lower interest rate

A secured loan can be a viable option for a homeowner simply looking to borrow a set amount of money for home expansion or improvements, a new car, debt consolidation, or any other purpose. It offers repayment periods ranging from three to 25 years depending on the amount of the loan. Interest rates vary based the borrower’s credit history and other risk based indicators. Ultimately, offers are much better with secured loans for both individuals with good and bad credit because of the element of secured property involved.

Sometimes borrowers are not necessarily looking to borrower money up front for a specific purpose, but are looking to reduce monthly expenses. As the Bank of England adjusts its base interest rate over time, mortgage product interest rates can go up or down, unless they are at a fixed rate. When the Bank goes through a period of rate easing as it had been in the early months of 2008, many mortgagees review their existing borrowing to determine if remortgaging is a good financial move.

Remortgaging?

Remortgaging can provide many benefits to home owners. If current interest rates offered by lenders are better than a mortgagee’s existing rate, remortgaging can provide reduced interest expenses on a monthly basis and total cost basis for the life of the loan. In other words, a better rate can save money and reduce monthly interest costs. Remortgaging is therefore a great option for borrowers not looking to take on additional debt, but wanting to improve the financial situation with their existing debt.

Some borrowers use remortgaging to apply the benefits of both secured loans and better rates. Cash out remortgage allows borrowers to remortgage to a better rate while taking out existing equity in their home. This option is good for those who want extra cash similar to a second charge, but also want to have all the debt at one low mortgage rate. Second charges are often given at slightly higher rates.

That all being said and done, remortgaging is not without costs and is not always the best move for a borrower. Some borrowers use remortgaging to get out of a high variable rate loan into a fixed rate loan when lending interest rates are low. There are arrangement fees charged by creditors to remortgage, just as there are to get a first mortgage. Borrowers must weigh the upfront costs with potential savings to determine if this is the right move for them. If you are planning to sell your home soon, remortgaging may not be a good option as you might not recoup the upfront costs.

Fees, fees and more fees!

In addition to arrangement fees, many lenders attach early redemption charges (ERCs) to mortgages to protect themselves from lost earnings when borrowers remortgage. Be aware of your mortgage features. An ERC is a penalty for paying off your existing early. Many lenders want to be compensated for lost interest when they lose a customer and use this protection.

Borrowers need to consider their goals when choosing a secured loan versus a remortgage. Acquiring cash can be accomplished with each, but current loan rates compared to rates on your existing mortgage can direct you to one or the other. Simple rate improvement or reduced monthly payment objectives can be accomplished from a remortgage under ideal circumstances.

To get the right solution for you:

• Sit down and take a long, hard look at your budget – can you realistically afford to borrow more money? Are there any other options (eg a zero percent credit card; a bank overdraft if the sum you want to borrow isn’t that big)
• Decide which type of borrowing best suits your circumstances. Using our service you can compare interest rates and terms and benefits among the different products as well as additional costs such as fees, meaning you can make an educated decision as to the right product for you
• Apply!