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Deciding Between A Secured Loan And A New Mortgage
Taking out a secured loan, or remortgaging the property is a decision faced by many individuals looking to refinance their home to raise money. Which one is better for you is not always clear and depends on different considerations. An early payment penalty is typically the most significant factor and usually kicks in if you pay off your mortgage early.
Some banks charge upwards from 8% of the mortgage as a penalty for prepayment. If your bank is one of these lenders, remortgaging early could cost you a pretty penny indeed. These penalties are frequently much more than the that of the secured loan alternative or "second charge" or "second mortgage".
Consider whether you currently have a discount mortgage, with a discounted floating or fixed rate for the first two to three years. These types of mortgages are particularly likely to carry a prepayment penalty. While not very common, it is also possible that this type of common mortgage would also impose a prepayment penalty even after the discount period.
If you do not have a significant prepayment fee in your case it would make sense to consider the fees involved in a secured loan transaction. Crucially, it is important to note that the rate charged on a secured loan is likely to be much higher than the rate on your mortgage, but it is on a smaller amount of principle generally. This tends to make remortgaging a more attractive option, however there are other matters to consider.
Consider as well the full amount it will cost you to take out a loan will be comprised of more than just the interest due on the loan. There of amounts to be paid for the valuers, administrators, lawyers, bankers and potentially for the title and broker costs. Typically, these costs do not apply across the board, although generally speaking you will have to pay the broker and title fees, even for a secured loan.
Also remember that the remortgage is typically a much larger principal amount and so even if the rate on the mortgage is less than the rate on the secured loan, if it greater than your previous mortgage rate, you could end up paying much more in interest over time. You must look at your total borrowing costs, net present value, rather than simply the interest rates or your initial monthly outlays.
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.
If you don't have the luxury of time, a remortgage may not be the best option for you. The approval process for a mortgage typically takes several weeks and it may even be months before the funds are actually deposited into your account. A secure loan, on the other hand, can be approved in two weeks in a best case scenario, so this may be a significant factor for you to consider.
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Compare thousands of different lending plans online and find the cheapest deal for your circumstances on a secured lending. We can help if you are raising funds for debt consolidation, or need to take out a home improvement lending.
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