When you’re looking to raise a high amount of finance, and you own your home, you have a couple of options open to you. The most popular choices to access the cash you have in your home (equity) is either to remortgage your home or put a second charge on the property by using a secured loan for whatever amount you need.
Both options are secured against your property, and both require you to have equity in your home. Which is best and why then become the questions you need to be answered.
The information to follow will explain the processes involved in each method of borrowing with some hypothetical scenarios for each borrowing option. The hope is that it should help you decide what the best method is for you to raise the finance you need on the most favourable terms to you.
Secured Loan Calculator vs a Remortgage Calculator
For a quick check on market rates, we run hypothetical figures through the remortgage calculator for CompareTheMarket.com and the same figures again through the Secured Loan (Homeowner calculator) using the same comparison website.
A property valued at £170,000, remortgaging over 10 years with a loan-to-value ratio of 30% to release £50,000. The best rate on offer was from Yorkshire Building Society at a fixed rate of 0.89% for the first two years, then reverting to a standard variable rate for the remaining 8-years – that’s currently 4.74%.
For the same amount over the same repayment time of 10 years for a secured loan, Paragon Exclusive come out as the best deal offering 3.9% for the 10-year duration.
Which is Best, the Secured Loan Vs Remortgage?
While you don’t get the lower introductory rate for the first two years using the secured loan option, you do get a lower rate than the standard variable that Yorkshire Building Society would charge after the two-year introductory rate expired.
To find out what the best option is for the amount you need to borrow, you will need to know how much your property is valued at, and the amount you’ve already paid towards your existing mortgage. What you’ve paid is the amount of equity you hold in the property. The higher your home equity, the better a rate you’ll be able to secure.
How Halifax Secured Loans Fair
Halifax is a leading specialist for UK secured loans, second charge mortgage products, and offer a variety of remortgaging options, so it’s no surprise many are looking to find out firstly if they can borrow and secondly, how much.
To answer the first question, Halifax will only lend to existing customers. Therefore, if you’re not currently a customer, you won’t be eligible for any of their borrowing options. To meet this requirement, you would need to open an account, and then consider borrowing.
It’s worth considering that when you’re asking the bank you hold your current account with to lend to you, they hold the most data about you. They know how much and often you’re dipping into your overdraft and the reason why, such as overdrawing on a Saturday night.
With regards to how much you can borrow, it would depend on firstly, having a mortgage. For homes that are mortgage-free, remortgaging won’t be possible as Halifax do not allow capital-raising on a mortgage-free property. Mortgage-free property owners would need to look at the Halifax secured loans.
Secondly, you need to consider why you’re applying for the loan as they may ask during the application process what you plan to use the loan for. For home improvement loans (covered further down this page), they may want to know you’ve planned your budget carefully prior to approval.
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To get a rough idea of what they may expect, they have published their own advice for managing the finance on home improvement projects.
Existing Halifax customers with a mortgage that has been in place for at least 6 months are able to apply for a minimum £10,000 borrowing. The total amount you can borrow can be up to 85% of your property value, or 75% in the case of interest only mortgage customers with the exception of a customer having any defaults on the repayments. In the case of any late payments, they will not approve further borrowing. This is the case with most mainstream lenders so if you find yourself in this situation, you will need to consider bad credit finance options for mortgage holders and homeowners.
To find out more about Halifax borrowing, they do have a website for brokers at: http://www.halifax-intermediaries.co.uk.
There is a variety of information on that site, including their lending criteria. The website does state that it’s “for the use of mortgage intermediaries and other professionals only”. This means that the offers are available to mortgage brokers and may not be available directly to customers. That’s not always the case though. You can use the site for research purposes, but not for financial advice.
The message is essentially there to protect Halifax from claims of borrowers using the information to make financial decisions. They do not offer advice and the content is for professionals who understand the terms and lingo used. There’s a risk that the general public could misinterpret the information, which is why the bank state that it’s to be used by professionals only. That’s all. You’ll find similar websites for all banks who make financial products available through mortgage brokers just by searching online for the bank name + intermediary. Just don’t use them for financial advice as that’s not the purpose of those websites.
How to Compare Secured Loans
A secured loan can be secured against any asset. When you’re using your home as security on the loan amount, most comparison websites will refer to this type of loan as a homeowner loan rather than a secured loan. The reason being, if you want to raise finance to buy a car, you could use the vehicle as the security rather than the home. A homeowner loan will be of higher value in most cases because it’s based on the valuation price of your home and the equity you have.
There are a few large comparison websites that can be used for an indication of what’s available. A few you may already know:
These sites cannot give you exact figures though because they base the best-secured loans on the indicated APRC (Annual Percentage Rate of Charge). They won’t take into account the potential charges you can incur in the process.
There are charges involved in taking out a secured loan, just as there are for remortgage products.
- Legal Fees
- Administration charges or Arrangement fees
- Valuation fees
- Broker Fees if applicable
The above just name a few. It’s possible for other charges to be involved depending on your personal circumstances.
Our best advice when you want to compare secured loans is:
- Research the APRC of each deal
- Review the terms and conditions of each deal
- Compare all the fees involved in the process
You will likely find that the best headline deal to be shown isn’t actually the best deal when the terms, conditions and fees are factored into the cost. Based on this, you then need to find out if you’d be suitable for the loan based on the lender’s criteria. For this stage, approach the lender and ask them if they can do a quotation search to prevent it being recorded on your credit files, which will lower your credit rating, especially if you compare two or more financial products.
Should You Remortgage to Pay for Home Improvements?
Remortgaging is a popular option for raising finance for a few popular purposes including:
- Debt consolidation
- Getting a better deal
- Releasing equity for home improvements
The first thing to consider is if you really need to use this option. It’s not always the best way to finance a home improvement project. If it’s a small project, perhaps £2,000 or £3,000, it may work out cheaper using 0% finance deals on credit card purchases if your credit rating permits that option. With bad credit, that’s usually not an option.
Unsecured loans can be another avenue worth exploring as you won’t be using your home as capital for the security. As of recent, some banks have been increasing the amounts customers can borrow as an unsecured loan, making finance more accessible for tenants. Unsecured loan amounts can go as high as £50,000 with some lenders, depending on your credit history.
In terms of the repayment options, the maximum duration is seven years to repay an unsecured loan. Secured loans can be repaid over longer terms such as 10 or 25 years, therefore they will lower your monthly premiums. Keep in mind that a lower monthly payment does not always reflect a lower interest amount. Because you’re repaying for longer, the total interest repayable on the loan amount can work out more expensive.
For larger home improvement projects, such as installing a conservatory, an extension or loft conversion though, that’s when you should consider the remortgaging option or taking out a secured loan. For larger investments, you’re best not get a baseline figure then approach lenders. Research and thorough planning should be done before applying for finance.
What sort of planning should you do?
Get a quote for how much your project is likely to cost and the length of time it’s likely to take. Ask a local contractor or use an online quotation search service.
Some options include:
Whatever project you’re planning on, you need to know what a contractor is likely to charge for both labour and the cost of materials. Some lenders may ask for details on how you’ve budgeted for the project. Without quotes for the work to be done, you could be refused.
Keep in mind that you may need to factor in for planning permission and building regulation inspections. Also, if you’re using an estimate rather than a quote, add a cushion in case the project goes over budget. This could be adding an additional 25% to the amount you think you need to ensure that you’ve enough finance in place in case the project goes over budget. Lenders will like to see that you have a cushion in your budget projections as many projects can easily drift out of control.
The other thing to consider prior to agreeing to any work being done is that you have a quote from the contractor and not an estimate. Estimates are only that. A guess at how much it will cost. A written quotation is more acceptable.
Finding the Best Secured Loans for Home Improvement Projects
Should you decide that the remortgaging option isn’t the best way to finance a home improvement project; the next thing to consider is a secured loan. The same research would be involved as it is for researching your remortgage options because you need a thorough budget to ensure you raise enough finance to cover the cost of the project through to completion. Not all lenders will ask to review your budget, but you’re best to know your figures prior to borrowing large amounts anyway. The last thing you want is to take on a large project and run out of funds, leaving you unable to see it through to completion. That could be a disaster.
When you know your budget, then use the advice outlined earlier about “How to Compare Secured Loans”.
In a nutshell, you don’t want to go with the best APRC, but instead narrow it by selecting a good APRC along with favourable admin charges, legal fees, any valuation fees, arrangement fees and any additional charges the lender applies to the loan.
Does a secured loan affect remortgaging?
Yes. A secured loan in the case of homeowner loans is a second charge on your mortgage. Therefore, any defaults would first see your mortgage lender paid from the proceeds of repossession and the second charge lender paid from what’s remaining.
When you raise finance with a secured loan for homeowners, you’re effectively placing a second charge loan on it; therefore it’s going to lower your equity. That will take a ripple effect by lowering your loan-to-value ratio, decreasing the total amount you can borrow against your home.
With enough equity in your home, and the ability to pass the affordability criteria, you’d be able to remortgage for a higher amount and use the excess to repay a secured loan. If you already have a secured loan and don’t have enough income to increase the amount of your remortgage, you may need to keep your mortgage and secured loan separate, so essentially remortgaging to pay off your debts may not be an option.
It is certainly possible to remortgage whilst you have an outstanding secured loan, but it does need to be considered in the application process because it affects the total amount you can borrow as it is placing a second charge loan against your home.
What’s better for Bad Credit Applicants – A Secured Loan or a Remortgage?
In situations where your credit reports are hindering your ability to access finance, the secured loan option is by far the easiest way forward. That’s not to say it’s the best option, just easier. The reason being, it’s a higher risk anyway because it’s a second charge on your property, but more importantly, the lending criteria for secured loans are not as strict as they are for mortgage products of any type.
For that reason, it’s often easier to raise finance through a secured loan. Sometimes with the funds released on the same day, but if you need this, expect the lender to have a higher arrangement fee. In most cases for a secured loan, when you’re using your home, expect it to take a few weeks, in particular when a valuation report is required by the lender.
There may also be instances for example if you’re self-employed and you used the old method of Self Certification to obtain your mortgage. If that were the case, it may prove difficult to remortgage your home with your real figures rather than what you used for your initial mortgage under the old self-certification scheme. Since that’s been abolished now, remortgaging could be difficult with certain lenders, in which case working with a mortgage broker with knowledge of lenders specialising in the UK self-employed mortgage sector would be the beneficial route to take.
The other thing you need to consider is if your mortgage term is due to expire. If you exit early, you’ll likely face early repayment penalties. In that case, then secured borrowing can let you access finance without incurring a heavy financial penalty for switching lenders before your mortgage term expires. If your mortgage has run its course and is now essentially floating on a variable rate or a tracker, and you can get a good deal on a remortgage, then it may work out financially in your favour in the long-term.
Secured loans are faster to access, but ultimately when you use your home as security, you’re placing a second charge on your home. Not a first charge, therefore it’s riskier to a lender. So too is bad credit though.
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Both scenarios will often have a higher interest rate attached to the loan amount, making your most important decision being which company to apply to for finance.
When you have impaired credit, to stand the best chance of approval, it is advisable to use a mortgage broker with expertise in the subprime market. They’ll be able to advise (provided they’re CeMap certified) on what lender is best suited to your personal situation.
Should you opt to go it alone, then the information above should point you in the right direction for researching the two options (secured loan or remortgaging) to raise the finance you want for whatever you need.