Deciding Between A Secured Loan And A New Mortgage

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".

If you originally took out a mortgage with discounted rates up front, either in a fixed or floating format, more than likely the mortgage will also carry a hefty prepayment penalty. Some of these "discount mortgages" are known to even carry the penalty forward until after the discounted rate period, so be sure to check the fine print carefully.

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.

Consider as well the full amount it will cost you to take out a loan will be comprised of more than just the interest due on the loan. There of amounts to be paid for the valuers, administrators, lawyers, bankers and potentially for the title and broker costs. Typically, these costs do not apply across the board, although generally speaking you will have to pay the broker and title fees, even for a secured loan.

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.

Timing is also a consideration. The mortgage approval process can be much longer, sometimes encompassing months before your actually get your hands on the cash. Secured loans tend to be paid out in a couple weeks under normal circumstances so if you have the luxury of time, you will want to heavily weigh this aspect of your decision.