Secured loans vs remortgaging
If you’re thinking of borrowing money against the value of your home, you will have several options to choose from, including getting a secured loan or remortgaging, which will allow you to borrow the money you need.
- Remortgaging – switching to another mortgage deal, allowing you to borrow more on top of your balance
- Secured loan – taking out a new loan that is secured against your property, ideal for those with bad credit
Both options come with a certain amount of risk, so should be approached with caution, though it’s worth getting as much information on both options before making a final decision. We’ve put together a small guide to help you discover the best option for you, so keep reading to find out more.
Is a secured loan better than a second mortgage?
You will normally find that a secured loan is a riskier prospect for a lender, as it can often be for those with bad credit looking for an alternative to an unsecured loan. In that regard, you might find that a secured loan will have a higher interest rate compared to a second mortgage.
A second mortgage will tend to be a better option overall in terms of your interest rate, simply because you should get the same rate as a standard mortgage. However, this will only be a viable option if you still have a good credit rating or if you’re earning more than you did when you first took out a mortgage.
What is a second mortgage?
More commonly known as remortgaging, a second mortgage is simply switching to a new mortgage deal, whilst being in the middle of repaying an existing one.
This is often a good way to borrow money if you’re a homeowner, though it usually relies on you having paid off a sizeable chunk of your existing mortgage first. Asking for a higher amount than your current mortgage balance means you can continue to pay off the remaining value of your home, while borrowing extra to do with as you please.
This will inevitably extend your loan period, depending on how much you would like to borrow, but it will allow you to borrow at a reasonable rate. However, if you now have a poor credit score or your circumstances have changed since you first got your original mortgage, you might find remortgaging won’t be an option.
What should I choose?
Your choice between a secured loan or remortgaging really depends on what your current circumstances are, and whether they’ve got better or worse since you took out your original mortgage. You should think about the following when deciding:
- You will get a better interest rate than a secured loan
- Get a similar deal to your original mortgage
- Think of it as adding more time onto your current mortgage
- Reliant on your credit score and current circumstances
- May have to pay early repayment fees to get out of your current mortgage
- Good option for those with a poor credit score
- Worse interest rate but still allows you to borrow
- Don’t have to pay any early repayment fees on your current mortgage
- Referred to as a second charge loan
Secured loan fees
If you have decided that a secured loan is the best option for your current circumstances, you should start by comparing interest rates and fees attached to the secured loan offer, to get a better idea of what you can expect to repay and how long you will be making repayments for.
You should look out for the following when comparing secured loans:
- Loan amount
- Loan term
- Interest rate
Missing a payment will mean you have to pay late fees on top of what you still owe, which will be outlined in the terms of the loan. The danger of missing too many repayments or failing to repay the secured loan, is that the lender will be entitled to repossess your home (otherwise known as foreclosure). Find out more about secured loans here:
Am I eligible for a secured loan?
Since you are more likely to be accepted for a secured loan than a personal loan due to the risk associated with it, chances are that even if you have a bad credit score you will still be eligible.
To make certain that you are though, it’s always worth using our free moneymatcher tool to confirm your eligibility. Just by entering a few personal details you can see secured loans that are the most appropriate for you, all without affecting your credit rating.
Written by Robert Bester
Published on 25th June 2019