Secured loans or remortgage? What's best for me
Think carefully before securing other debts against your property
Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it
The difference between the two is that with a remortgage, you are replacing your existing mortgage with a new one; while with a secured loan, you are taking out a second mortgage on top of your existing mortgage.
The reason why people compare these two solutions is to identify which would be most appropriate (for their circumstances) to raise capital in order to fund home improvements, a large purchase such as a wedding or a holiday, or consolidate debts.
What is the difference between a secured loan and a remortgage?
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:
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’
What is a capital raise mortgage?
A capital raise mortgage is a type of remortgage used to raise money against a property. It enables homeowners to access equity from their property: the total amount between the current mortgage and the property’s value. This is the same process as a secured loan.
For context, let’s say your home is valued at £250,000, and your mortgage is currently valued at £200,000.
This means you have £50,000 in equity in your home. If you need to raise £10,000, you could apply for a capital raise mortgage and up your mortgage value to £210,000. This frees up £10,000 for you to put towards a specific purchase or debt consolidation, for example.
Remember, the interest rates you pay back on your mortgage are determined by your loan-to-value ratio (LTV). The higher your LTV, the more your interest repayments could be.
Therefore, the amount of capital you need to raise could determine whether or not you slip into a higher LTV band when you remortgage. This can affect the amount you would need to pay back each month. If you’re concerned this might apply to you, consult your mortgage broker.
This leads us to the big question: in order to raise this capital, should you remortgage or get a secured loan?
When is a secured loan better than a remortgage to raise captial?
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
When is a remortgage better than a secured loan to raise capital?
You’ve come to the end of your mortgage term (meaning you don’t have an ERC to pay), and you’ve built up enough equity to use for a capital raise mortgage
Your mortgage broker has found you a more favourable rate that will over time, offset the cost of paying your ERC fee
You need to borrow a substantial amount of money, which would require a long repayment period
You only want one credit agreement to think about
Here is a hypothetical scenario of when it would be best to remortgage to raise capital:
You need to raise £10,000 in order to make some home improvements. You’re at the end of your current fixed deal and need to remortgage. This means you have no early repayment charge to pay.
1. You have £50,000 worth of equity and your home is worth £250,000. This means your mortgage value is £200,000.
2. You increase your mortgage value when you remortgage with a new lender to £210,000 in order to raise the £10,000 equity.
3. You’re careful not to slip into a higher LTV band in order to maintain suitable monthly repayments for your new mortgage value.
Does a secured loan affect remortgaging?
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.
Minimum and maximum ages
Applicants must be over 18, with the maximum term finishing before they turn 80-85 depending on the lender
No minimum occupancy requirement with most lenders
There is no minimum income requirement with most lenders
Smaller property values
No minimum property value requirement with most lenders
Important info & marketing claims
You may have to pay an early repayment charge to your existing lender if you remortgage. Your savings will depend on personal circumstances.
Your home may be repossessed if you do not keep up repayments on your mortgage.
*The savings figure of £420 is based on Better.co.uk remortgage customers in October 2023. Read more on our marketing claims page.
We can't always guarantee we will be able to help you with your mortgage application depending on your credit history and circumstances.
Average mortgage decision and approval times are based on Better.co.uk's historic data for lenders we submit applications to.
Tracker rates are identified after comparing over 12,000 mortgage products from over 100 mortgage lenders.
As of January 2023, Better.co.uk has access to over 100 lenders. This number is subject to change.
For buy-to-let landlords, there's no guarantee that it will be possible to arrange continuous letting of a property, nor that rental income will be sufficient to meet the cost of the mortgage.