Secured loan or remortgage: how to compare your options

What changes with each option?

Second charge mortgage rates tend to be higher than first mortgage rates. However, comparing those rates in isolation misses the effect on the money you already owe.³

An example of the borrowing structure

Suppose you owe £200,000 on your mortgage and need another £40,000. Ignoring fees for this illustration:

1. A second charge loan would leave the £200,000 mortgage in place and add a separate £40,000 loan.
2. A remortgage with additional borrowing would replace the existing mortgage with £240,000 of new borrowing.

Both routes leave £240,000 secured against the property before any financed fees. The difference is which rates, terms and charges apply to that money. These figures illustrate the structure, not eligibility or a loan offer.

When could keeping your mortgage matter?

If your existing mortgage rate is lower than the replacement rate available to you, moving the whole balance could increase its cost. A second charge mortgage can leave that existing deal in place while you borrow separately.¹

An early repayment charge on your first mortgage may also affect the comparison. Ask the lender for the amount payable on the date you expect to switch. Do not assume that the charge stays the same throughout the remaining deal period.⁴

Preserving the mortgage is only one part of the decision. The second charge loan brings its own interest, fees and repayments. Those costs may outweigh the benefit of retaining the original deal.

When could remortgaging be worth comparing?

If your current deal is ending, you may already need to review the rate on your existing balance. Comparing a replacement mortgage that includes the extra money can then be useful. A remortgage may also be relevant if the available terms improve on your current borrowing after switching costs.²

One replacement mortgage may be easier to manage than two separate agreements. That convenience does not establish that it is cheaper. Check whether the proposed repayment term extends the period over which you will repay your existing debt.

How to compare the costs properly

1. Start with the same amount of additional money

Tell the adviser how much you need for your purpose after fees. Distinguish the loan balance from the amount you will actually receive.

Fees added to borrowing increase the balance and can attract interest. Fees deducted from the advance reduce the money available to use. Include broker and lender fees, valuation or legal costs and any charge for closing your existing mortgage. Ask when each fee is payable and whether it is refundable.^{4, 5}

2. Include the existing mortgage in both calculations

For the secured loan route, compare your existing mortgage payments plus the new loan payments. For remortgaging, compare the payments on the whole replacement mortgage.

In the example above, comparing only the payment on the £40,000 loan with the payment on a £240,000 remortgage would tell you very little. The existing £200,000 mortgage still needs to be paid under the second charge option.

3. Compare over the same period

Ask the adviser to use a common comparison date, such as when your present mortgage deal ends. Then consider the longer term as well.

For each route, look at payments made, fees paid separately and the total debt remaining at that date. A route with smaller payments may simply leave more borrowing outstanding. If you expect to repay or refinance then, include any early repayment charges and other relevant costs. Avoid counting financed fees twice.

The same principle applies to a planned house move. The cost of leaving the arrangement can matter as much as the cost of starting it.

4. Check the repayment term separately from the rate

A lower monthly payment can result from spreading repayments over more years. That can increase total interest, even when the rate appears attractive. The FCA has specifically highlighted the importance of explaining increased overall costs when promoting lower monthly payments.³

For example, if your current mortgage has 15 years remaining, a proposed 25 year replacement term would extend repayment of the existing balance by ten years. Ask to see an option that retains the original remaining term, if affordable and available, so the effect is clear.

5. Account for future rate changes

A fixed interest rate normally lasts for an agreed period, which may be shorter than the mortgage term. A variable rate can change. With two mortgages, the fixed periods may end at different times.⁶

Ask what happens to each payment when its deal ends. A comparison that assumes your current low rate lasts throughout the entire secured loan term could be misleading.

6. Use APRC alongside the actual figures

The annual percentage rate of charge, or APRC, combines interest and relevant charges using prescribed assumptions over the mortgage term. It helps explain the cost of an individual mortgage but cannot predict future variable rates.⁷

A second charge loan's APRC does not include the cost of your separate existing mortgage. Do not treat it as the price of the combined arrangement. Read the personalised illustrations and compare the full payment schedules, fees and outstanding balances.⁵

What will lenders assess?

Both routes require the lender to be satisfied that the proposed additional borrowing is affordable. Your income, household spending, existing commitments and relevant future changes all matter. Substantial equity cannot replace an affordability assessment.⁸

Property value also affects the borrowing available. Equity is the property's value less the debt secured against it. Loan to value expresses borrowing as a percentage of the property's value. For a second charge application, the lender considers the existing mortgage alongside the proposed loan.^{1, 9}

Your credit history and the lender's criteria can affect the options and terms available. Do not assume that a second charge loan will be accepted because a remortgage was declined. Nor should a refusal be taken as a reason to borrow more or extend the term without understanding the consequences.

Ask your existing lender about a further advance

A further advance is additional borrowing from your current mortgage lender, typically at a different rate from the original mortgage. It may let you retain your existing deal while arranging the extra money with the same lender.¹⁰

Ask for a quote showing the additional repayments, fees and term. Compare it with the second charge and remortgage options. Availability depends on the lender's criteria and your circumstances.

A product transfer usually means switching the deal on your existing mortgage with the same lender. It does not, by itself, provide extra funds. Ask whether additional borrowing would require a separate application.²

For a smaller expense, also consider whether savings, delaying the work or an unsecured loan could meet the need. Protect enough of your budget for unexpected household costs.¹¹

Take particular care with debt consolidation

Using either a secured loan or a larger remortgage to repay unsecured debts puts the replacement borrowing against your home. The debt remains payable, even though the original accounts are cleared.¹²

Think carefully before securing other debts against your home.

Compare the cost of retaining the existing debts with the new arrangement, including fees and the period over which you will repay. Reducing the monthly commitment by extending repayment can increase the total paid. Avoid rebuilding balances on the cards or accounts you have cleared.^{3, 12}

If existing repayments or essential bills are already difficult to manage, seek free debt advice before increasing borrowing against your property. MoneyHelper can help you find support.¹¹

Questions to ask before deciding

Can I take a secured loan now and remortgage later?

It may be possible, but a future remortgage is not guaranteed. Eligibility will depend on circumstances and lending criteria at the time. Include the second charge settlement amount and any early repayment charges when considering the plan. Do not rely on a future refinance to make today's repayments affordable.⁸

Is it worth waiting until my fixed deal ends?

If the expense can wait, compare that possibility. Waiting may avoid an early repayment charge on your existing mortgage, but future rates and available offers are uncertain. Ask for the costs of acting now and the assumptions behind waiting to be shown separately.^{4, 6}

What happens if I sell my home?

Borrowing secured against the property normally needs to be repaid on sale unless the lender agrees another arrangement. A second charge loan can therefore affect the money left for your next purchase. Check settlement figures and charges before relying on a particular amount of sale proceeds.¹

Comparing secured borrowing through Habitat Loans

Habitat Loans introduces customers to Loans Warehouse, where a qualified broker can help you explore a secured loan quote. Mortgage advice and arranging services are provided through the broker. Fees may apply.¹³

Ask the adviser to explain why the proposed loan suits your needs, which alternatives were considered and how the combined mortgage costs compare. Before committing, you should understand what you will receive, what you will repay and how the decision affects your home and future budget.⁵