Should you take out a secured loan or remortgage?

At a glance

• Secured loans and remortgages are both options for homeowners looking to raise finance.
• Secured loans may be suitable for those whose credit rating has fallen below the required level to remortgage.
• In both cases, your home will be at risk if you don’t keep up with the repayments.

If you’re a homeowner looking to raise finance, you’ve generally got two key options – take out a secured loan, or remortgage to release some equity. Both of these options can provide a substantial lump sum that could be used for things like home improvements or debt consolidation, usually at a lower rate than if you were to take out an unsecured loan.

However, both of these funding methods rely on putting your home up as collateral – which is why secured loans are also known as second charge mortgages or homeowner loans – so it’s important to consider your options thoroughly. Here’s everything you need to know about choosing secured loans or remortgaging.

Second charge mortgage vs. remortgaging

Second charge mortgages (or secured loans) and remortgages are both forms of credit that are secured against your property, which means they’re only available to homeowners.

They typically have long terms (up to 40 years in some cases) and you’re expected to make regular monthly repayments, and in both cases your property could be repossessed should you default on your agreement. But this is where the bulk of the similarities end.

Second charge mortgages

These are a type of secured loan taken out against the equity available in your current property. Your mortgage lender has a 'first charge' against your home, meaning should you default they have first claim on the proceeds from the sale of the property.

The secured loan is then a 'second charge' against the property – a second loan in addition to the mortgage. If you default, the lender of the secured loan has to wait until any debt is recovered by the first mortgage lender before they can recover their own outstanding debt.

This type of loan is typically variable rate and often comes with higher interest rates than remortgage deals. This is because the criteria are often less strict – you may be able to find suitable loans with a lower credit rating, for example – and also because they are second in line, there’s no guarantee that the lender will recover their loss should you default, so they’re taking on additional risk as well.

Remortgaging

In this arrangement, you pay off an existing mortgage with a new one, either from your current provider or a new lender. This most often occurs when you reach the end of a mortgage deal, though you can also use a remortgage for home improvements or other large purchases as well.

However, if you want to release equity before the end of a mortgage term, make sure to check for any early repayment charges that may apply, which are particularly common for fixed rate deals. Note that when you remortgage, you only have one mortgage contract, whereas with a secured loan you essentially have two.

You can start a remortgage comparison by looking at our best remortgage deals.

How do secured loans and remortgages work?

Both types of mortgage are only available to homeowners, but there are some differences in how they operate.

For second charge mortgages, you will need to have equity in your property that is at least equal to the loan amount you hope to secure against it.

For example, if you have £100,000 worth of equity in your home you may qualify for a £75,000 loan, but if you only have £50,000 in equity you wouldn’t. If you’re approved you’ll then essentially have a second mortgage against your property, which may have very different rates and payment terms to the original mortgage deal.

You can apply for this kind of loan at any time – as it’s separate to your original mortgage deal, there’s no need to wait until the end of any fixed term. These loans also tend to be available to those with lower credit scores, largely as you’re asking to borrow less money than for a full remortgage, but you may face higher rates as a result. Yet it’s still a loan that’s secured against your property, so you must keep up with the repayments or your home will be at risk.

Remortgages, on the other hand, are loans to cover the entire mortgage amount, and you may be able to borrow extra if you have enough equity in your property. You can remortgage with your current lender or can search for a new provider, and once approved you’ll only have this one mortgage secured against your home.

Bear in mind that you may only be able to remortgage once you reach the end of your current mortgage term, as things like early repayment charges could make it unfeasible otherwise (find out more about when is a good time to remortgage). And as with any mortgage, the money borrowed is secured against the value of your home, meaning you could be at risk of losing your property if you fail to keep up with repayments.

Should I remortgage or get a secured loan?

This really depends on your individual circumstances. The best option for you is influenced by a whole range of factors, including:

How much you want to borrow

If you’re looking for a relatively small amount and don’t want to wait until the end of your mortgage term, you may be more inclined to seek a secured loan. Smaller borrowing amounts can often work out cheaper with a secured loan, even if you’re paying higher rates, as the term will typically be shorter which means you could end up paying less interest overall. Conversely, if you need to borrow a significant sum and want to use your equity to do it, it may be better to remortgage at a lower rate.

Your mortgage situation

If you’re in the middle of a fixed rate mortgage term, it may not be possible to remortgage as the fees involved (through ERCs) could make it prohibitive. In this case, a secured loan may be the best option. However, if you’re approaching the end of the term, it may be better to wait until you’re able to remortgage without penalty, though this may depend on the rates involved.

Cost

The cost will always come into it, and while the interest rate will make the biggest difference, it’s important to consider things like the fees involved as well. You’ll likely have arrangement fees for secured loans and potentially valuation fees if it’s a larger amount, and the same applies to remortgaging. You can find out more about potential fees involved in our guide to the costs of buying a home.

Financial situation

Your credit score, income and outgoings can all affect how much you’re able to borrow, as well as the interest rates offered, but also if you’ll be eligible at all. If you’re thinking of applying it’s important to make sure your finances are as healthy as possible – start by taking a look at your budget, checking your credit score and improving it if necessary, as this can all impact your application. Remember that secured loans can still be offered to those with a poor credit rating, but the interest rates will often be higher.

Individual circumstances

It could be that your personal circumstances have changed since taking out the original mortgage, making it harder to meet affordability requirements for a new deal, or your credit score has dropped below your current lender’s requirements. In such cases remortgaging may not be ideal as it will likely be more difficult to be approved, and you could be charged higher rates as well.

Does a secured loan affect remortgaging?

If you take out a secured loan, what happens when it’s time to remortgage? There’s no simple answer as it often depends what your lenders will permit, but you typically have two options: pay off the secured loan by borrowing extra through your new remortgage deal – essentially combining the two – or keep the secured loan separate.

However, if you were to borrow more through remortgaging it means your loan-to-value (LTV) and affordability metrics would change, and that could impact the rate you’re offered and whether you’d be eligible for it in the first place. Yet if you wanted to keep the secured loan separate rather than consolidating, it could make the process a lot more complex, and not all lenders will permit it. So while you can remortgage if you have a secured loan, it may not be easy, which is why it’s so important to seek advice.