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Pros And Cons Of Choosing To Remortgage Versus A Secured Loan

By: Ed Ward

Remortgage your home or take out a second charge against it in the form of a secured loan, which is the better deal? To make a sound decision, you will need to consider several different aspects of the decision, first and foremost is the penalty you may have to pay by repaying your mortgage early. If you intend to pay off a mortgage early in life of the loan this could be significant.

With some lending institutions charging 7.5% or higher as a penalty for paying off a mortgage early, you need to be careful whether this will apply to you. Yes you may have seen remortgage rates that are much less than rates on secured loans, however if you have to pay a large penalty to do the refinancing, your out of pocket expense will be greater.

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.

Don't forget that the overall cost of your loan consists of more than just the interest due on the outstanding principal. There are costs associated with valuing, administering and getting the deal passed by a lawyer and the lender, as well costs to cover the title and broker charges. The majority of these costs, barring the final two, are generally not applicable in a secured loan transaction.

One other item not to forget about is that mortgages are generally taken out on much larger amounts than the secured loans being considered, and so a lower rate on a remortgage deal, even if it is lower than that available on the secured loan, could still spell trouble if it is significaly higher than the rate on the original mortgage.

The repayment terms of the loans are a very important part of the process, and you should examine each of the offers you have very carefully in this regard. In particular, if you find yourself locked into a repayment plan for a secured loan spanning several years, you may not be able to pay off the loan early, even if you are able to do so, and this can cost you quite a bit of money. Note as well that individuals with recent bad credit problems may have more luck with the secured loan approach.

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.

Article Source: Main Articles

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