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Deciding Between A Secured Loan And A New Mortgage

Jan 16, 2008
Remortgage your home or take out a second charge against it in the form of a secured loan, which is the better deal? To make a sound decision, you will need to consider several different aspects of the decision, first and foremost is the penalty you may have to pay by repaying your mortgage early. If you intend to pay off a mortgage early in life of the loan this could be significant.

Some banks charge upwards from 8% of the mortgage as a penalty for prepayment. If your bank is one of these lenders, remortgaging early could cost you a pretty penny indeed. These penalties are frequently much more than the that of the secured loan alternative or "second charge" or "second mortgage".

The type of mortgage you currently have will have a bearing on whether these types of penalties apply. If, for example, you have a discount mortgage, with either a fixed or floating rate that is at a discount for the first three years then you are more than likely going to face a stiff penalty for early repayment. Bear in mind that some mortgages continue to impose a penalty even after the initial low rate period.

If you do not have a significant prepayment fee in your case it would make sense to consider the fees involved in a secured loan transaction. Crucially, it is important to note that the rate charged on a secured loan is likely to be much higher than the rate on your mortgage, but it is on a smaller amount of principle generally. This tends to make remortgaging a more attractive option, however there are other matters to consider.

Don't forget that the overall cost of your loan consists of more than just the interest due on the outstanding principal. There are costs associated with valuing, administering and getting the deal passed by a lawyer and the lender, as well costs to cover the title and broker charges. The majority of these costs, barring the final two, are generally not applicable in a secured loan transaction.

Also remember that the remortgage is typically a much larger principal amount and so even if the rate on the mortgage is less than the rate on the secured loan, if it greater than your previous mortgage rate, you could end up paying much more in interest over time. You must look at your total borrowing costs, net present value, rather than simply the interest rates or your initial monthly outlays.

The repayment terms of the loans are a very important part of the process, and you should examine each of the offers you have very carefully in this regard. In particular, if you find yourself locked into a repayment plan for a secured loan spanning several years, you may not be able to pay off the loan early, even if you are able to do so, and this can cost you quite a bit of money. Note as well that individuals with recent bad credit problems may have more luck with the secured loan approach.

If you don't have the luxury of time, a remortgage may not be the best option for you. The approval process for a mortgage typically takes several weeks and it may even be months before the funds are actually deposited into your account. A secure loan, on the other hand, can be approved in two weeks in a best case scenario, so this may be a significant factor for you to consider.
About the Author
Search thousands of unique loan plans online and get the best loan for your circumstances on a secured loan. We can help if you are raising funds for debt consolidation, or need to take out a home improvement loan .
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