Does a Secured Loan Affect Remortgaging?
Having a loan secured against your home doesn’t necessarily mean you can’t remortgage, but it will play a part in the lender’s decision and may limit the options that you have.
It can be possible to remortgage if you have a second loan secured against your property. The second loan will however have an impact on the lender’s decision. That’s because it affects whether the lender considers you can afford to remortgage.
Whether you’re looking to borrow more on your mortgage to pay off the second loan or to remortgage and keep repaying it in parallel with the loan will also come into it.
How a secured homeowner loan works
If you have a loan secured against your property, the equity you have in your home – which is how much of it you own outright – acts as security for the money you borrow. This is in addition to the original secured loan that you are paying off, which is your first mortgage.
The second loan – sometimes called a second charge mortgage – is paid off separately to your first mortgage, but both mortgage loans are secured against the one property.
The risk to you is that if you fall behind on payments of either or both loans, the lender may repossess your home and sell it to pay off the balance. It may also take legal action to cover any shortfall. The first mortgage provider takes priority over the second loan provider, so your mortgage would be paid off first. The same applies if you sell your property.
Can you remortgage with a secured loan?
It is possible to remortgage with a secured loan on a property, but the lender will take this second debt into account and there may be fewer options available to you. Remortgaging means getting a new mortgage deal, either with a new lender or with your existing lender.
When you ask to remortgage, the lender will carry out an affordability assessment to check whether you’ll be able to make the monthly repayments. For example, it will look at your income, day-to-day expenses, and any existing debts you are repaying. The amount you can borrow and the interest rate you’re offered will also depend on how much of your home you own, or your loan-to-value ratio (LTV).
Lenders will also check your credit report to see, for example, if you have missed any loan repayments, or your credit history has worsened since your last mortgage deal. Your credit score may affect whether the lender will accept your remortgage application and the interest rate it will charge.
» MORE: How does remortgaging work?
Why remortgage if you have a secured loan?
You may want to remortgage to save money on your mortgage rate. This might be when you are nearing the end of your current fixed or discount mortgage deal and want to avoid being moved on to the lender’s standard variable rate (SVR). The SVR is usually higher than introductory discount rates. Remortgaging can also let you make other changes so your mortgage suits you better.
You may want to borrow more on your first mortgage to pay off the second loan, so you are only paying off one debt on your primary mortgage. If your property’s value has gone up and you own more equity in your home over time, remortgaging might help open up lower interest rates. And the remortgage rate may be lower than the interest rate you are paying on the second loan, though how much interest you’ll pay overall will depend on how long it will take you to repay your mortgage.
Just bear in mind that if your financial circumstances have changed, such as a drop in your income, it might affect the rates you are offered. The secured loan and any other debts you’re also paying off may also prevent you getting the lowest rates.
How remortgaging with a secured loan works
There are two main routes you might consider if you’re remortgaging with a second loan.
Remortgage to borrow more and pay off the second loan
One option may be to borrow more on your mortgage to pay off the second secured loan. This would mean only repaying one lender, and potentially at a lower interest rate than you are paying on the second loan.
The amount you might be able to borrow when you remortgage will depend on your income, affordability, your credit rating and how much equity you have in your property.
You may also consider other ways of paying off the loan instead of borrowing more on your mortgage.
Remortgage and keep the second loan separate
If you don’t want to clear the secured loan debt through remortgaging, you could keep the second secured loan separate while remortgaging to a different deal.
You’ll need to find lenders that accept remortgages when you have a second secured loan. Also be aware that the second loan’s effect on your finances will be considered when the lender works out the loan’s affordability.
Switching to a different fixed or variable mortgage rate with your current lender while not changing anything else is known as a product transfer, rather than a remortgage. It may not always mean the best rates, but it might be a more straightforward option. With a product transfer, you would keep paying off the second debt as you won’t be borrowing more to pay it off.
The process of remortgaging with a secured loan may be a little more involved than a usual remortgage. For example, you may have to pay additional legal fees for the paperwork between lenders and it may be a slightly longer process than a standard remortgage.
Be clear about remortgaging fees and charges
You’ll want to consider your timing when you leave a mortgage deal. That’s because if you leave a deal before the tie-in period ends you may pay an early repayment charge. Your policy documents should set these fees out but if you’re not sure, ask your lender.
There may also be set-up charges for the new mortgage, such as admin and legal fees, so these extra costs need factoring in when you do your calculations.
As you can see, there are quite a few variables to bear in mind. You might want to talk through your options with a mortgage adviser or broker. They can access more specialist lenders and help you find the best rates but something to consider is they may also charge a fee.
» COMPARE: Remortgage deals
WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.
Image source: Getty Images
Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years. Read more