If you have a secured loan alongside your main mortgage, this in itself should not prevent you from remortgaging.
But it is likely to affect the choice of lenders and the ability to obtain the best terms. The mainstream lenders do not like existing second or third charges. It is another layer of risk, and hassle, should they need to repossess the property. (What is a second charge on a property?)
For those lenders that are interested, they will need to take into account the monthly payments for the secured loan, as well as for the proposed new mortgage. Provided this passes their affordability checks all should be OK.
But as we know, life is not always that simple.
In this article we look at what a secured loan is and how it can affect the process of remortgaging your home.
By understanding what a secured loan means, and how lenders view it, you can make a better decision about remortgaging. If you need any help, don’t hesitate to contact a qualified mortgage adviser for more information or advice. They will be able to advise you on the best course of action and provide invaluable support throughout the process.
What’s a secured loan?
A secured loan is a type of second mortgage that you take out in addition to your main mortgage.
They are also known as second charge mortgages or homeowner loans.
The 2nd loan will be with a different lender and you will make separate monthly repayments towards it.
Secured loans are often taken out when additional borrowing is needed but the existing mortgage lender can’t or won’t approve the extra debt via a further advance. Read our article Second charge vs further advance for some background details.
As it is secured against your home, if you don’t keep up the repayments the lender could force the sale of your property to get their money back.
How does remortgaging work?
Remortgaging usually refers to the process of transferring your main mortgage over to a new lender but without moving home.
People remortgage for a few different reasons but one of the most popular is to secure an interest rate deal that is better than the one offered by their existing lender. You apply for a remortgage with your chosen lender and once this is approved the money is used to fully repay and replace the current mortgage.
Depending on your eligibility it may also be possible to borrow some extra money at this point.
We are often asked “is a remortgage based on income?“, and the answer is yes. All lenders will need to see proof of your income. Additional documents may also be needed, these will include ID and bank statements.
The key point to remember is that if you have an existing secured loan or any other debt alongside your current mortgage, this must be taken into account when applying for a new mortgage. Failure to do this could result in the mortgage application being declined as it will show up on your credit history.
Having a secured loan alongside your main mortgage should not necessarily prevent you from remortgaging. However, it may limit the lenders and products available to you and can also potentially affect the amount of money you are able to borrow. You might encounter some delays if you want to borrow more money with a capital raising remortgage.
But with careful planning and research, it is still possible to successfully remortgage with a secured loan in place.
You wouldn’t normally need to pay a deposit to remortgage. The lender will accept your equity instead. But, if you have spare savings to put towards your mortgage you may be able to get a better deal.
It is important to seek advice from an independent mortgage broker before making any decisions. They can assess your individual circumstances and advise you on the best course of action. This could potentially save you time and money in the long run.
Why would you remortgage if you have a secured loan?
Things in life don’t always go to plan.
Remortgaging with a second mortgage in place does make the process trickier. But the main reason why you would want to do this is because your interest rate deal is about to end and you want to avoid being moved to the lenders standard variable rate (SVR).
Maybe when you needed the second mortgage money you would have had to pay redemption penalties if you changed the main mortgage. Or perhaps your financial situation at that time meant that a secured loan was the best option and things have now improved.
Perhaps the remortgage will be used to pay off other debts.
Whatever the reason, if you believe that remortgaging will save you money in the long-term, it’s worth looking at. It is important to take into consideration the monthly payments for both mortgages, and make sure that you are able to afford them. You should also look around and compare different lenders and products in order to get the best deal.
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How remortgaging with a secured loan works
This situation means that you have two legal charges registered on the property.
One for your main mortgage, known as a first charge.
And one for the secured loan, known as a second charge.
When researching your remortgage options both of these charges need to be considered and there are two possible choices:
Remortgage and keep the secured loan
There would need to be a convincing reason to keep the secured loan in this scenario. The remortgage interest rates on offer would be much lower than the loan.
Keeping a 2nd charge on the property while remortgaging is the more difficult of the two options. There are many lenders that will not allow another charge to be registered at the same time that they grant you a mortgage.
Nevertheless, there are lenders that are not so picky and there’s a good number of them to choose from.
One reason for keeping the loan in place is because it was not possible to secure affordable mortgage terms for the higher mortgage amount needed to repay the loan.
Also, ERCs or early repayment charges are expensive. If these apply to the homeowner loan then that’s another reason to delay the repayment.
It may also be possible to switch interest rate deals without moving lender. This is known as a product transfer.
Remortgage and pay off the secured loan
This is normally the preferred option as it lowers the overall cost of borrowing due to the lower interest rates charged by remortgage lenders.
You would apply for a remortgage large enough so that it replaces your main mortgage and pays off the secured loan. You then make just one mortgage payment each month to the new lender.
You will need to meet the lender’s eligibility criteria for this to work and also pass their affordability checks.
The fees and costs for doing all of this need to be carefully analysed, including any early repayment fees on the secured second mortgage.
This process is known as debt consolidation.
In summary
When it comes to remortgaging, there are a few things you need to take into consideration.
Firstly, you need to decide whether or not you want to keep the secured loan in place. If you do, make sure that the interest rate on the new mortgage is lower than the rate on the secured loan. Secondly, you need to research different lenders and products in order to get the best deal possible. And finally, make sure that you can afford both mortgages before making any final decisions.
Although the application process is quite straightforward it’s a good idea to see what documents are needed for a secured loan before you start. Your mortgage adviser will be aware of these and can help to get everything in order.
Not on the High Street!
The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Second Charge Mortgages
It’s important to get expert advice when taking out a second mortgage as there are a lot of things to consider.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Complex Mortgages
A complex mortgage could be considered any situation that does not fit with the standard lenders. Typically this would be borrowers who have multiple income streams and/or properties of non-standard construction.
FREQUENTLY ASKED QUESTIONS
Is a secured loan a second mortgage?
Yes. Where there is a main mortgage in place, extra secured borrowing could be called a secured loan or second mortgage?
Can you sell your house if you have a secured loan?
Yes. Whether you have just one main mortgage or a few secured loans, you are able to sell your house and the solicitor will pay off all of the loans with the proceeds.
How long should a remortgage take?
A remortgage would normally take 6-8 weeks. Where a second charge is involved it will probably take a few weeks longer.
Do secured loans have exit penalties?
In general most do have exit fees for early repayment, so it’s important to request a redemption statement before making any decisions.
Will I need a solicitor?
A solicitor is required to complete the legal side of a re-mortgage. But you are unlikely to need your own solicitor. Most lenders will let you use theirs for free or at a reduced rate.
Can I remortgage with bad credit?
Yes, there are remortgage lenders that specialise in helping borrowers who have bad credit.
