Remortgage your property or take out a secured loan, such is the dilemma faced by many homeowners looking to raise cash funds. The better solution depends on a number of factors, the first of which is whether there is a redemption penalty for paying off your current mortgage early. Will the money you borrow be used to pay off your current mortgage
Some banks charge upwards from 8% of the mortgage as a penalty for prepayment. If your bank is one of these lenders, remortgaging early could cost you a pretty penny indeed. These penalties are frequently much more than the that of the secured loan alternative or second charge or second mortgage.
Consider whether you currently have a discount mortgage, with a discounted floating or fixed rate for the first two to three years. These types of mortgages are particularly likely to carry a prepayment penalty. While not very common, it is also possible that this type of common mortgage would also impose a prepayment penalty even after the discount period.
In the case where you do not have to worry about paying a penalty for prepayment, then you should consider the fees involved with taking out a secured loan. Importantly, it is crucial to note that that secured borrowing carries an interest rate generally much higher than what you would typically find on a mortgage, even though it is on a smaller amount. This will tend to favour a remortgage when looking at simply the APR charged on the loan, but that’s not all you need examine.
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.
Also remember that the remortgage is typically a much larger principal amount and so even if the rate on the mortgage is less than the rate on the secured loan, if it greater than your previous mortgage rate, you could end up paying much more in interest over time. You must look at your total borrowing costs, net present value, rather than simply the interest rates or your initial monthly outlays.
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.