Remortgage vs Loan: Best Financial Choices

If you need to borrow a large sum of money, for instance, to fund home improvements or to pay for a wedding, you may consider taking out a loan and then paying it back over time. However, the interest rates on loans can be off-putting to some, so in this article we explore when and why you would take out a loan, rather than remortgaging, and what alternative options are available to you.

What is a remortgage?

A remortgage is what happens when you switch from one mortgage product to another. This may be with the same lender, or with a different one. People often remortgage when they reach the end of a fixed deal in order to secure a more attractive rate than the standard variable rate that they would otherwise be moved onto.

Another reason why someone might remortgage is to take advantage of lower interest rates, although be aware that early repayment fees may apply if you are not close to the end of the term of your current mortgage deal. Alternatively, you might want to swap from an interest-only to a repayment mortgage or want to borrow more money from your mortgage lender.

Remortgage deals change frequently so you should always compare the market before deciding to switch mortgage products. The Free Price Compare remortgage calculator allows you to compare all of the deals for which you are eligible to ensure that you get the best value for money.

What is the difference between a remortgage and a loan?

Typically, a remortgage replaces one outstanding balance with another of the same value but with a more attractive interest rate or repayment term. Sometimes, people will use a remortgage to increase the level of their borrowing, taking the excess as cash.

This can blur the lines between a remortgage and a loan, with many believing that there is no difference between the financial products. However, a loan is usually used when someone wishes to borrow money, above and beyond any existing financial commitments or debt.

The easiest way to distinguish between a remortgage and a loan is that a loan need not be secured against your property, whilst a mortgage always is.

What is the difference between a loan and a secured loan?

An unsecured (or personal) loan is the term used to describe a situation wherein somebody borrows up to £50,000 from a financial institution without it being secured against an asset. They will agree on the value of the loan, the monthly repayment amount, the term of the loan and the applicable interest rate at the outset and commit to repaying it.

A secured loan is often for a larger value, with many lenders offering secured loans of up to £100,000 and they are usually offered for a longer term. In order to qualify for a secured loan, you must be able to offer the lender an item of value to use as collateral. This is usually your home, but sometimes a vehicle or other high-value asset will be considered by a lender as appropriate collateral.

You can usually secure a more attractive interest rate with a property secured loan than with a personal loan. This is because the lender is taking less risk in lending to you, due to their ability to sell your asset to reclaim the outstanding balance of your loan should you default on your payments.

What happens if I take out a personal loan and default on the payments?

Defaulting is the term applied when you fail to make loan repayments in accordance with the agreed repayment schedule [1]. When you miss the first payment, your lender will write to you to advise you that you have missed a payment and give you the opportunity to remedy the situation.

Many lenders will allow you a grace period if you contact them as soon as you realise that you will struggle to make the necessary payments or engage honestly with them when they first write to you. If you fail to engage, most lenders will consider you to be a personal loan delinquent if you go 90 days without making a payment.

At this point, the defaults will be reported to the main three credit bureaus and this information will be added to your credit report. This means that your credit score will drop, which will make it harder to secure credit in the future, and what credit you are eligible for will usually attract higher rates of interest.

The lender will continue to contact you to seek payment, and if it is not forthcoming, they may hand the debt to a debt collection agency. They are legally entitled to seek repayment via the courts, through a lien on your property or from your wages at source.

What happens if I take out a secured loan and default on the payments?

A secured loan will be secured against an asset of value and if you default on your payments, the lender will take the steps detailed above to recover the outstanding balance. Should they be unsuccessful, they are legally entitled to repossess and sell the asset to recover the balance of the loan. This means that if a loan is secured against your home and you cease making the necessary payments, the lender can sell your home to repay the debt, effectively leaving you homeless.

If you have any concerns about your ability to repay a loan, be it personal or secured, you must in the first instance engage with your lender and seek a resolution. Most lenders will agree to reduce your monthly payments by extending the payment term, freezing the interest payments or allowing you a temporary payment holiday if you ask in good time.

If you need additional debt management support, there are a number of organisations that can help you to put in place a debt management plan and who will even engage with your creditors for you. These organisations include Citizens Advice [2] and debt charity StepChange [3].

Should I remortgage or take out a secured loan for home improvements?

Home improvements are generally performed to increase the value of a property or to increase the comfort of its occupiers. Often, home improvements such as an extension will allow the homeowners to reside in the property for a longer period than would otherwise be practical. In these instances, borrowing money to improve their home is often more cost-effective than moving house to one which already has all of the features that they are planning to add to their own property.

The most cost-effective way of borrowing a large sum of money when you already have an attractive mortgage product is to ask your existing lender to increase the value of the loan and withdraw the excess as cash. This allows you to keep the existing terms and conditions, interest rate and repayment schedule whilst also accessing the cash that you need to improve your home.

Provided that the work is complete before the end of the mortgage deal, it is likely that you will save money on your next remortgage rates. This is due to the property having increased in value, having achieved an improved loan-to-value ratio [4]. You should always compare the available options to ensure that you access the best remortgage deals. This might make better financial sense than remaining loyal to your existing lender.

If you are unable to borrow extra money against your existing mortgage product and are at a point in your mortgage where you will not attract significant fees for remortgaging, this is usually a more attractive option than taking out a separate secured loan. You can perform a secured loan versus remortgage comparison to ensure that you select the best value option for your particular circumstances.

If you are unable to remortgage, then taking out a secured loan will be considered a second charge mortgage [5] against the property. The interest rate will likely not be as favourable as that associated with a mortgage as the outstanding mortgage balance is considered the priority debt and therefore the lender is taking a larger risk in lending to you.

What happens if I default on the payments for my mortgage?

A mortgage is secured against your home so ultimately, failure to pay can result in the lender repossessing your home to reclaim the value of the outstanding debt.

This will not happen immediately. As with defaulting on a loan, the lender will first write to you to advise you that a payment has been missed, and allow you the opportunity to engage and to restore your payments. Only if no effort is made to achieve a mutually acceptable outcome will they begin court proceedings [6] to take possession of the property.

What is the best way of securing a large sum of money if I have a poor credit score?

Before applying for a loan or looking to increase the value of your mortgage, you should first assure yourself that you do indeed need the funds right now. If you were able to delay for a few months or years this might allow you time to save the money instead.

Deferring planned home improvements not only gives you time to save up the money that you need, but it will also allow you to refine your design and seek out the best value supplier. In this time, you could also take other measures to improve your credit score [7] in order to be eligible for better deals should you need them in the future.

If you need to borrow a large sum of money for a reason not associated with property improvements, for example for debt consolidation, you should ensure that you understand and accept the terms and conditions of the loan.

You should also be absolutely certain that the repayments will be affordable for the entire duration of the loan, even if your circumstances change. If the loan repayments become unaffordable in the future and you default, your credit score will further decrease which could affect your ability to seek credit or take out a mortgage at a later point in time.

All lenders have different criteria. Therefore once you have determined that you do indeed need the money now and that no alternative options will satisfy your needs, you should use the Free Price Compare secured loan comparison tool to ensure that you get the best secured loan that is available to you.

What alternatives exist to secure a large sum of money?

The best way of securing a large sum of money is to save. You should compare your income to your outgoings, and if necessary, reduce your outgoings by switching to cheaper insurance, broadband or television deals, or shopping more efficiently. The more money you can save every month, the quicker your savings pot will grow.

If you do not have time to save, then you could ask a friend or family member to lend you the money that you need. This is an attractive option as it is unlikely that they will charge you interest and may allow you to repay in full once you have saved the required amount rather than making monthly payments. However, borrowing money and failing to repay it is the quickest way to sour a relationship. Therefore, if you choose this option, make sure that you agree on the terms and conditions of the loan, and if possible, have them formally written into a family loan agreement [8].

Summary

The decision to borrow money should never be taken lightly but where it is deemed to be the most appropriate way of achieving your life aims, you should always use a loan or remortgage calculator in the UK to ensure that you get the best deal for your personal circumstances.

References

• [1]www.experian.com
• [2]www.citizensadvice.org.uk
• [3]www.stepchange.org
• [4]www.investopedia.com
• [5]www.justice.gov.uk
• [6]www.experian.co.uk
• [7]hodgebank.co.uk