Remortgage Versus Secured Loan: Which Is The Better Option?
Taking out a secured loan, or remortgaging the property is a decision faced by many individuals looking to refinance their home to raise money. Which one is better for you is not always clear and depends on different considerations. An early payment penalty is typically the most significant factor and usually kicks in if you pay off your mortgage early.
With some lending institutions charging 7.5% or higher as a penalty for paying off a mortgage early, you need to be careful whether this will apply to you. Yes you may have seen remortgage rates that are much less than rates on secured loans, however if you have to pay a large penalty to do the refinancing, your out of pocket expense will be greater.
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 are lucky enough to not be face with a hefty penalty for paying off your mortgage early, then you should start to look at the fees associated with a secured loan transaction. A key aspect for you to think about is that the the rate on a second charge loan will tend to be much higher than what you typically have on a mortgage. This may make the remortgage option appear more attractive on a straight interest rate comparison, but there is more to it than that.
Bear in mind that the total cost of borrowing is greater than simply the interest paid on the loan. There are fees involving valuation, administration, legal, lender and potentially title and broker fees involved. Most of these fees, except for the last two, are not typically charged in a secured loan transaction.
And don’t forget that mortgages are generally taken out on a much larger total sum, and therefore the APR of the mortgage may well be less than what is being suggested for the secured loan, nonetheless if it is higher than your previous mortgage rate, the overall cost of borrowing, discounted over time, could greatly exceed the savings from the lower transaction cost secured loan.
Also be sure to check the repayment terms for the different options you have to hand. You may find yourself locked in for longer than you are comfortable with, which could inhibit you from paying off the loan early if you have a cash lump sum available. Note that if you have had any recent credit difficulties, you may find it easier to take out a secured loan.
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.
