Secured Loan or a Remortgage

Re financing or securing a loan on your property will usually bring up certain questions about which would be better – a secured loan or full remortgage. Here I hope to give you an insight as to whether a secured loan or a full refinance would be best suited for your needs.

There are a few distinct differences between secured loans (often called a second charge) and remortgaging. The one that’s best suited for you will depend on your individual circumstances.

Before we look at the differences, lets look at the similarities between the two.

Similarities with a secured loan and a remortgage

The obvious similarity between a secured loan and a remortgage is that they are both asset backed loans, meaning they are both loans that are secured on land or property. For most borrowers this would be their home, which is the largest investment most of us will ever make.

Secured loan and remortgage application processes are similar in the way they are underwritten by a lender. They both require you to earn enough money to repay the loan and will also require enough equity in the property to fit in with the lenders criteria. Your credit status may also determine if you would be eligible.

Generally speaking the more equity available and the better ones credit, the better the deal available. Both will require similar documents in order to be able to complete, such as:

  • Lender application form
  • Proof of ID (passport or driving licence)
  • Proof of residence (utility or council tax bill)
  • Proof of income

Secured loan benefits over a remortgage

There are a number of attributes secured loans offer that may benefit you over remortgaging. One of the main reasons people may look at a secured loan rather than a remortgage is that a 2nd charge will not need the existing mortgage to be repaid. If your existing mortgage is still in a special deal period such as a fixed or discounted rate, it may have redemption penalties attached and a full remortgage would mean the redemption penalties would need to be paid. As a secured loan does not require you to repay your existing mortgage, no penalties would need to be paid.

There are also no legal or valuation fees attached to residential secured loans and they could complete within 2 to 4 weeks.

A secured loan will sit behind your 1st mortgage, the secured loan lender will require permission from your first mortgage company in order for a second charge to complete. This is why they are often referred to as second mortgages. In legal terms, the 1st mortgage company will be first in line should the property be sold, which is reflected by the (normally) higher interest rates applied to second charge loans. A second charge will also allow a lower amount to be borrowed – usually starting at around ten thousand pounds.

Secured loan advantages could be seen as:

  • Quicker completions
  • More Flexible underwriting criteria for complicated cases
  • Affordability calculations tend to be more forgiving
  • Won’t disturb your main mortgage, payments are kept separate
  • Credit rating may not be such an issue

A 2nd charge loan could be cheaper even with a higher interest rate as you will not need to refinance your entire mortgage, instead you’ll only be raising the additional funds required.

Remortgage benefits over a secured loan

One of the main downsides to a 2nd charge secured loan would be that the payments run alongside the mortgage and are not wrapped up within the same payment. Raising funds via a remortgage will mean there are no additional payments on the property, other than the mortgage. This could mean a secured loan may cost more on a monthly basis after the mortgage payments are factored in, as opposed to raising the funds by a 1st charge alone.

Remortgage advantages could be seen as:

  • Potentially lower interest rates
  • One single monthly payment
  • Could be cheaper long term

With a full refinance, you’ll have one single payment instead of a mortgage payment and a secured loan payment. A remortgage could be easier to manage and cheaper in the long run. It will also mean that the new lender will not have to ask permission from your existing lender, as they will be repaid once the application completes.

Every situation is different, which is why I would recommend speaking to a qualified advisor to help you decide what would be best suited to your needs.

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