Secured loan or remortgage?

If you have enough equity in your home, you may be able to turn some of it into cash with a secured loan or remortgage. In case you’re not familiar with the term ‘equity’…

Equity equals

the value of a property minus

the amount owed on it (mortgage / secured loans)

So equity is the portion of the home that you owe nothing on. Let’s say Mr Evans has a £50,000 mortgage on his £150,000 house. On a repayment mortgage, that means he has £100,000 of equity – basically, he owns 2/3 of the house and is (gradually) buying the other 1/3 from his mortgage provider.

What are secured loans and remortgages?

Secured loans and remortgages are two ways people can turn their equity into cash.

People can also remortgage:

· to get a better mortgage deal,

· to speed up / slow down the rate at which they’re repaying their mortgage, or

· because they’ve reached the end of their mortgage term.

… but in this article we’re looking at remortgages designed to free up equity.

Secured loans and remortgages both involve borrowing money from a lender and securing it against your property. On the plus side, this means you’ll probably be offered a much lower interest rate than you’d be offered on an unsecured loan.

However, your home could be at risk if you don’t keep up with your repayments, as the reason why lenders can offer you a lower rate is because they’re taking a lesser risk with their money – they’d have the option of repossessing your home if there was no other way you could pay them back.

Secured loans and remortgages – what’s the difference?

In our example, Mr Evans could free up a reasonable amount of his equity (for home improvements, debt consolidation, etc.) with either a remortgage or a secured loan. Let’s say he wants to take out £50,000.

Remortgages

A remortgage would be a replacement for his mortgage. It’s a new, larger mortgage – big enough to replace his current mortgage and free up some of his equity, turning it into cash.

• He could take out a £100,000 mortgage, so he could pay off his £50,000 mortgage and have £50,000 left over.
• He’d then need to repay that £100,000 mortgage. Compared with his old £50,000 mortgage, repaying this £100,000 mortgage would either cost him more per month, take longer, or both.

Secured loans

A secured loan would be in addition to his mortgage. It’s a loan – a bit like an unsecured loan, but secured against the equity in his property.

• He could take out a £50,000 secured loan.
• He’d then need to keep repaying his £50,000 mortgage (exactly as he used to) and start repaying that £50,000 secured loan.

Secured loans and remortgages – what’s the risk?

Be aware that secured loans and remortgages have their ‘cons’ as well as their ‘pros’.

First of all, as mentioned earlier, you’re potentially putting your property at risk if you can’t keep up with the repayments.

Plus, property prices are falling at the moment. Mr Evans’ £150,000 house could be worth £140,000 three years from now, or £130,000 – or £170,000! There are lots of different predictions, but no-one knows for sure.

So the more equity he takes out, the greater his chances of ending up in negative equity (owing more on the house than it’s actually worth) if the value of his house drops further.

Falling prices are one reason lenders are more cautious about giving out mortgages today (especially mortgages that are worth nearly as much as the property). Like any secured debt, a mortgage needs to be secured against something that’s worth at least as much the mortgage – otherwise, it’s not really ‘secured’!

Secured loans and remortgages – the right way forward?

For some people, a secured loan or remortgage can be a great way to get their hands on some ‘liquid’ cash. For others, it might be a bad idea – if they don’t have much equity in their home, for example, or if they’re not sure they’ll be able to afford the repayments.

Even if you find a lender who’s prepared to give you a secured loan or remortgage, that doesn’t necessarily mean it’s a good idea. Before you commit yourself to anything, you should discuss your options with an expert who understands the secured loan and remortgage markets, and can help you decide which – if either – of the two is the right one for you.