A re-mortgage has long been viewed as providing a relatively cheap way of raising money. The rates obtainable on a mortgage are of course far less than those on unsecured loans. However there are times where it is not advisable to re-mortgage in pursuit of capital raising.
There are many occasions when a second charge/secured loan provides a more appropriate funding solution to a re-mortgage. The most obvious example is where a borrower has a large redemption penalty on their existing mortgage.
Early redemption penalties take various forms and of course each lender’s terms and conditions will differ. Some fixed rate mortgages carry penalties of up to 7% of the outstanding mortgage balance if redeemed within the fixed rate period.
Some will even carry an overhang penalty after the tie in penalty comes to an end, although this is not so common these days.
An important consideration to bear in mind is that of the overall cost of the loan.
The APR is a tool that can be used when comparing different products as it will take into account associated fees and charges. The remortgage process carries many different fees including valuation and administration fees, lender arrangement fees, legal fees, and in many cases, broker fees, discharge fees, title insurance and telegraphic transfer fees. These fees can often amount to thousands of pounds and should not be ignored.
Secured loans will carry very few of these fees outlined and will usually only be subject to the lender’s arrangement fee and a broker fee.
In order to assess the most advantageous financial solution, the total cost of borrowing must be compared between both options. It must be stressed that each case should always be assessed on its own merits in order to work out the most appropriate financial solution.
For example, many borrowers are benefiting from low Bank Base Tracker products which are not so readily available in today market. A secured loans allows the borrower to keep these low rates and pay the higher rates on just the additional secured loan borrowing.
For borrowers with a blemished credit record, if their original mortgage was taken out before running into credit problems, the chances are that raising additional finance through a remortgage would mean paying a higher interest rate on the entire amount of their borrowings. (i.e the WHOLE mortgage) By using a secured loan in this case, they can still benefit from the prime rate of interest on their mortgage whilst only being charged a higher non-conforming rate on the new secured loan.
While the overall cost of borrowing is a major consideration, other factors should also be considered. Speed is an important factor that is often overlooked when assessing the remortgage versus secured loan comparison. It is however, just as valid in a compliance context as overall cost.
Typically secured loans can complete in around 21 days. When a client needs to obtain additional finance quickly, then the usual concerns that govern suitability need to be tempered by the time frame in which the client needs their funds. Provided they are aware of the facts, then if speed is the primary issue, a secured loan will win every time over remortgage or further advance.