Secured loans or remortgage? What's best for me

The difference between the two is straightforward:

• With a remortgage, you are replacing your existing mortgage with a new one.

• With a secured loan, you are taking out a second mortgage on top of your existing mortgage.

Why would you do one over the other? That’s what we’ll cover in this article. 

In the context of why you might be comparing secured loans and remortgaging, you are likely to be trying to do one of the following things:

• Home Improvements

• Large purchases such as weddings, holidays, or investments in other properties

• Debt consolidation for personal loans, such as credit cards

• Change mortgage rates but are finding rates are too high at the moment, or you have a high early repayment charge

You could also be finding that you can’t qualify for an unsecured loan because of either poor credit rating, too much-existing debt, age, or employment status. 

If any of these reasons apply to you, you’ve likely landed on these solutions:

• Apply for a secured loan by using your property as collateral

• Remortgage with a product called a ‘capital raise mortgage’

• You’ve recently become self-employed and don’t have proof of income required to remortgage

• You need a quick cash injection (secured loan time frames can differ from lender to lender, but remortgaging can take even longer)

• Your early repayment charge (ERC) for remortgaging is too high, so you need to raise funds via an alternative route

• When you need to raise capital but have a higher loan-to-value ratio

• When you require interest-only payments for lower monthly costs

• You have bad credit

Here is a hypothetical scenario of when it would be best to apply for a secured loan to raise capital:

You’ve slipped into bad credit due to unpaid personal credit card debts. You need to raise £10,000 to consolidate your debts, and you need to try and improve your credit score in order to qualify for more favourable mortgage options when it’s time to remortgage:

1. You have £50,000 worth of equity in your home

2. You raise £10,000 worth of capital by taking out a secured loan against that equity

3. You pay off your existing debts

4. You now have £40,000 worth of equity in your home

5. You now have a £10,000 second mortgage to pay back over a certain period of time

6. You do not default on any of the monthly repayments for either your mortgage or your secured loan, and your credit score begins to improve

Yes, taking out a secured loan may affect your ability to remortgage in the future. As is the case when taking out any type of loan, you run the risk of not being able to pay it back should circumstances change. Should you default on your secured loan repayment, this can have a negative impact on your credit score. In turn, this can impact how risky a lender views you. 

Additionally, some lenders may have a maximum loan-to-value ratio they are willing to offer when you remortgage, and any loans taken out against the equity of your home will count against that limit. 

Before taking on any new secured debt, do your research and consider how it may impact other future decisions such as remortgaging. We strongly recommend you speak to a mortgage broker to help you with this.