What’s more beneficial, a remortgage or a secured loan?
Our mortgage advisors are often asked this question, so we’ve prepared this article to be as informative as possible.
The information below will explain remortgages and secured loans in greater detail. This will allow you to assess which option may be more suitable for yourself.
Our expert mortgage advisors are also available to answer any questions if you’re still unsure. You can call us on 0800 195 0490 or make an online enquiry.
What is a secured loan?
A secured loan is where a lender will place a legally binding charge on an asset as security for a loan. The lender uses your asset as a security measure in the event that the loan is not repaid. A secured loan is secured with what’s known as a second charge. The first charge will usually be secured by your mortgage lender.
Some lenders will allow multiple charges to be added in addition to their own. If your current lender agrees to provide you with a secured loan, they wouldn’t place a second charge on your asset. A secured loan from your existing lender would be known as a ‘further advance’.
The benefits of using your existing lender are that they may be more inclined to offer you preferential rates. This isn’t always the case, so do check what your current lender is prepared to offer you.
The rates for any additional charges will generally be higher than the rates on your original mortgage because of the attached risk that the lender is taking.
There are a lot of risks involved for additional lenders willing to offer second charge secured loans. This is because your original lender will get the first refusal of any equity in the property. Any lenders that remain will only get a share of remaining funds. There’s a chance that there won’t be any funds remaining and in cases where this happens, lenders won’t receive any funds back at all.
When should I consider a secured loan?
As each person’s circumstances vary, there isn’t one answer that’s suitable for everyone. Nonetheless, our expert advisors have described common situations below where secured loans may be more favourable to remortgaging.
You’re already on a great mortgage rate
If you’re already on a great mortgage rate, it may not be wise to remortgage. This is especially true if available rates are higher.
This is usually the case with old variable-rate mortgages that were originally taken out a number of years ago. As interest rates were higher back then, variable rates followed the Bank of England base rate and had little, if any of their own rates attached. As the Bank of England base rate decreased over the years, this meant that lenders had to increase their own rates in addition to the variable base rate to make lending viable.
If you’re already on a great deal but need further finance, a secured loan may be an option to consider.
You need to raise 95% LTV
If you need to raise funds for 95% loan to value, a remortgage wouldn’t be sufficient. Remortgages will generally only go up to 90% LTV and that’s only in certain circumstances.
There are lenders who can offer a 95% LTV in the form of a secured loan. 95% LTV products are usually only available to applicants who have straightforward circumstances.
If you need to raise finance fast
Life can be unexpected at times and savings can plummet without warning. If you need capital as a matter of urgency, then a secured loan may be the only possible option.
Secured loans can be approved pretty fast. If your loan to value is low and a lender is happy to proceed without a valuation, funds can even be released on the same day.
Typically, secured loans will take longer than this but in almost all cases, will be faster than getting a mortgage.
You’ve recently become self-employed
If you’ve recently become self-employed then mortgage approval will depend on your own individual circumstances, such as if you have at least one years’ accounts or have future contracted work.
If you don’t quite yet have one years’ accounts or have recently changed the structure of your business, getting a mortgage may be difficult. Our advisors can check to see if you qualify for a mortgage. If you don’t qualify, then a secured loan may be your next option.
With newly self-employed applicants, lenders tend to offer more flexibility with secured loans as opposed to mortgages. Lenders may accept figures on turnover instead of net profit. If you haven’t yet filed accounts, lenders may accept bank statements as proof of income. This is particularly useful for self-employed applicants who declare a very low net profit.
If you have bad credit
Many people think that getting a remortgage with bad credit is impossible, but that’s far from the truth. Our advisors secure remortgages on a daily basis for applicants with credit issues.
Secured loan lenders tend to offer more flexibility when assessing applicants with adverse credit, in comparison to mortgage lenders. Secured loans can also be offered with smaller deposits. Getting a secured loan with bad credit can be high risk, so it’s not something you’d want to rush.
What our specialist mortgage advisors say
Anyone looking to raise capital should always consider the traditional method of remortgaging first. The rate of borrowing is cheaper almost all of the time when compared to secured loans. Always aim to at least get some remortgage quotes before considering a secured loan.
If you need a financial boost, then a secured loan may be your only option. Consult an advisor who understands the market and has access to specialist lenders who offer both mortgages and secured loans.
Your advisor can then demonstrate each product and inform you of their advantages and disadvantages. Based on this, they can then recommend certain products that are suitable.