Secured loan or remortgage?

You need a significantly-sized loan, most likely for purchasing a new car, making home improvements or for consolidating existing personal debt. Or perhaps there's a summer wedding to finance. Whatever the reason, which is the more economical option for raising funds, a secured loan or the remortgage route?

As always, circumstances need to be considered and numbers crunched. On the face of it the low mortgage rates currently available suggest the choice is a 'no-brainer' but the interest rate is not the only factor in the equation.

Compare remortgages now

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Do you have sufficient equity in your property? If a first time buyer probably not; house prices and values have remained fairly static these past months. On the other hand you may have a flexible mortgage allowing you to top up your financial commitment. For instance, a house valued at £200,000 and a deal allowing you to borrow up to 80% of this value will furnish a further £30,000 (at a competitive rate) if your existing mortgage is £130,000.

You could look for a cheaper mortgage of course. The market is at its most competitive for years, but fiscal excitement over a lower interest rate achieved by remortgaging can be easily dampened by the fees involved.

Although valuation fees are usually waived for remortgages, there's the cost of arrangement and the exit or redemption fee incurred in closing down the existing mortgage. Lenders have got wise of late and are using such fees to partly compensate for their lower interest income.

Check every part of a mortgage's cost. According to research, arrangement fees have increased by an average 42% since last year; £700 is now not an uncommon charge.

Worse are the exit fees, viewed by many as a deliberate 'milking' exercise. It has been reported that over the past year 53 lenders have increased their exit fees, 23 of them by more than 100%. Paying £295 to exit and £700 to enter raises the stakes somewhat if you're seeking a good remortgage deal. And there might be legal bills to cover as well.

Would a secured loan make sense?

In contrast to the usually long term of a mortgage, a secured loan can vary in duration from three years to 25 years, with amounts available ranging from £5,000 up to £100,000. It is secured against the home, that usually being a borrower's most valuable collateral.

If there is an existing mortgage then the secured loan represents a 'second charge', one of the reasons why the interest rate is around two percentage points more on the APR scale (reflecting the fact that your mortgage provider has first call on the home should you default and go bust).

Second charge secured loans are often granted quickly, provided you meet the borrowing criteria. The amount, term and APR will depend on your equity in the property, the lender's assessment of your ability to repay and any adverse credit circumstances.

Remember, your home is a risk of being repossessed if you default on repayment, whether for a mortgage or a secured loan. The need to repay the loan invariably requires continuing gainful employment, so financial protection against sickness or redundancy is essential.

Many lenders incorporate payment protection insurance (PPI) within the loan. In recent months there has been much disquiet over its 'overpriced' nature and the Financial Services Authority is now scrutinising the market.

A report by Morgan Stanley estimates as much as 20% of banks' profits comes from the sale of PPI policies alongside credit cards and personal loans. Such a policy can effectively push an APR of 7.9% up to 23.6% on a £10,000 loan!

Robin Amlot
02 August 2005 © Moneyextra.com

Want to secure a loan against your property? Are you looking to borrow a large sum of money for a new car or dream kitchen? Check out Moneyextra's secured loans .

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.