When is a secured loan better than a remortgage?


Pete Mugleston

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What are secured loans?

Secured loans are loans where the lender takes a legal charge over an asset (usually a property) in order to protect the money lent in event of default. They are added on top of a first charge (a mortgage) and so are often referred to as second charges, but in fact some lenders allow third, fourth, fifth etc. A secured loan with the same lender as your first charge mortgage provider may offer better rates and is often known as a 'further advance'.

The rates tend to be higher than first charges because of the increased risk to the lender, where a 1st charge gets first dibs on any equity if a house is repossessed and sold, and the subsequent charges take their share of whatever's left over. If there's nothing then tough.



So, if rates are higher, why would someone want a secured loan over a mortgage?

There's a few instances when borrowers might be better advised to consider:

  • When you have an unbeatable mortgage rate. It's less common in the last year or so with lenders raising standard variable rates (SVR's), but occasionally we come across a mortgage of unfathomable quality. Rates that are so low they actually cost the lender money. They are old mortgages sold based on rates being high at the time, that promise a mortgage tracking with a small margin above the bank or England rate, and borrowers interest paid can be as low as 0.99%! It's most likely that these borrowers will be forced to change their rate, and very unlikely that the lender will offer more cash at the same rate. Therefore those wanting additional cash from their property without changing the underlying mortgage will need to take a secured loan either with the same provider or a new lender altogether.
  • When you want the money quick time! Secured loans can be quick to set up, and in some cases where the LTV is low and a valuation isn't necessarily required, money can be released same day. Usually however, this process can be longer and may take a week or so. If a valuation is required then an additional few days would be required in order for the valued to view the property and write the appropriate report for assessment. Generally though, the time from application to money in account is much much quicker than a mortgage.
  • When you're struggling to prove your income (emp type change/old self cert) For self employed applicants looking for a first charge mortgage, it's currently possible to get a mortgage with one years accounts as an absolute minimum. For secured lending things can be more flexible and certain lenders will accept business turnover, and even 9 months bank statements as proof of income. This is helpful for those who have recently gone self employed or changed trading style, and cannot get a mortgage without the full accounts, its also useful for those who declare larger expenses and have relatively low net profits. Those self employed applicants from 4/5 years ago, who borrowed based on what they told the lender their income was, may also favour secured loans as they may no longer qualify for mortgages based on their accounts.
  • When you want the borrowing interest only. Secured lending can be interest only within certain parameters, sometimes without the need for a proven repayment vehicle. Main mortgages would require vehicles within very strict criteria, and now many lenders don't offer these mortgages at all.
  • When you want to raise cash up to 95% of the value of your property. Currently it's not possible to raise money up to 95% LTV on a main remortgage, you can only do like for like mortgage transfers and raise money up to 90%. Some secured loan lenders are happy to go up to 95% for certain customers who meet their criteria (would need to be clean credit ideally).
  • When you have more severe credit history that mortgage lenders won't accept. At the moment, main mortgage lenders can be quite flexible with their criteria when it comes to bad credit mortgage lending, accepting bankrupt or customers with CCJs etc. so long as they have the right equity and income. With secured lending however, there are certain lenders who will consider a much wider and severe range of credit issues, often at higher loan to values.

Summary:

Borrowing is can be far cheaper for main mortgages and this should usually be the first choice for most homeowners looking to raise additional funds. For anyone looking for immediate cash in hand, to save their existing mortgage, or to borrow with exceptional circumstances, a secured loan may still be more appropriate.


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