You might have considered a secured loan to raise the funds for home renovations, extensions, or other costs. However, a lot of people wonder if having a secured loan will affect their ability to remortgage their property to a better deal.
Ultimately, a secured loan doesn’t impact your ability to remortgage, factors such as credit score, affordability and loan-to-value do, we’ll explore these terms in this article.
What is a secured loan?
A secured loan is where the amount you borrow is secured against something you own. In the case of a secured homeowner loan, the loan will be secured against the equity you have in the property.
A secured homeowner loan is often called a second charge mortgage. When you have this kind of loan, you will have to pay off both your mortgages at the same time, making two payments each month, usually to two different lenders.
If you fail to make your monthly payments, most lenders will give you a chance to sort out payment plans or arrange support if you are struggling to keep up with your payments.
Why would you want to remortgage?
There are lots of reasons that you might want to remortgage; to release some of the value of your property, to get a better rate, or to simplify your monthly mortgage payments.
If you are reaching the end of your lender’s introductory offer, you might want to remortgage to avoid being put on to their standard variable rate as these tend to be higher and go up or down linked to the Bank of England base rate meaning some uncertainty in how much you’ll have to pay each month.
Having a second mortgage means having to make two payments each month, so remortgaging and consolidating the total amount could let you pay off the second mortgage and combine it into the new loan. This means that you will only be making one payment each month, which can be simpler and easier to manage.
How to remortgage with a secured loan
If you want to remortgage and consolidate your secured loan you should seek advice, either from a mortgage broker or your lender, they will be able to calculate based on your circumstances the most suitable option for you.
Remortgaging more to pay off the second loan
When you consolidate the loan, you effectively reduce the amount of the property you own, for example, if your property is worth £500,000 and you have a mortgage for £250,000 and a second charge for £50,000 you will need to remortgage £300,000, this increases your loan to value. So your original mortgage goes from a 50% loan to value to a 60% loan to value. As this introduces more risk for the lender they typically charge higher rates of interest the higher the loan to value.
It is also worth noting that when you get to 80% loan to value or above you may be restricted by the number of lenders who offer these types of products.
Because you are looking to borrow more money the lender will also check your credit score, this provides them with a view on how well you manage your money and may influence the decision on the rate they offer you. They will also check your affordability, this is their calculation on whether you can afford to pay the loan back each month based on your income and outgoings, the result of this may influence how much money they are willing to offer you.
Remortgage and keep the second loan
If you don’t want to combine your mortgage with your secured loan, you can always look at remortgaging just for the primary mortgage. This requires finding a lender that will accept you having a secured loan because the second mortgage will have to be considered alongside your income and outgoings to calculate affordability.
Remortgaging like this can be a more complicated process compared to paying off both loans. You might have additional legal fees to pay, and the approval and processing of your remortgage could take slightly longer than with a standard mortgage application.
This process should be similar to getting your original mortgage. However, you should check with all the lenders involved that you are okay to remortgage in this way.
Product transfers
It is also possible to move your current mortgage to a different interest rate with your current lender. This is known as a product transfer. This might allow you to get a new fixed-rate term for your mortgage without having to find a new lender. While the rates you get offered will often not be as competitive as some lenders new business rates, it can be much simpler and quicker compared to remortgaging. Because you are simply changing products, this does not give you the option of combining your two mortgages into one.
Understand remortgaging fees and finances
If you want to remortgage, you should be aware of the fees involved including:
Early repayment charges: Remortgaging means paying off your current mortgage in full with the funds of the new mortgage. If you are still in your introductory period, you might have to pay early payment charges to do this. You can check your contract for details of any charges.
Arrangement fees: You will likely need to pay administration and legal fees, although many lenders will offer “fee-free” remortgaging as long as you’re not looking to borrow any additional money.
Advice fees: If you go through a broker, you may also have to pay advice fees, though mortgage brokers can help you find better deals than you might find on your own.
When you are looking for a new mortgage deal, it is important to look at your finances, including:
Affordability: How much you can afford to spend each month on your repayments. You might find that you can increase your payments, to reduce the term length of your mortgage, or you might need to look for a mortgage with a longer repayment term, to reduce your monthly outgoings.
Your credit score: If your credit score has dropped since you originally took out your mortgage and secured loan, you might find that you are not eligible for the same kind of deals as before. This could make remortgaging more expensive. If your credit score has dropped, you can look at ways to improve it.
Debt-to-income ratio: Compared to when you got your first mortgage, having a secured loan against your home can make your debt-to-income ratio less favourable, which can make it harder to get a loan unless you are combining the two in which case the lender doing the remortgage will ignore the monthly repayment.
Remember, if you are unsure how to approach remortgaging your property, you should look at getting professional advice. This can help you make the right financial decision for your specific situation.