Remortgage, Further Borrowing or Secured Loan
- See also:
- authorised debt settlement
- comparison matrix
- consolidation loan
- debt management
- IVA
- bankruptcy
- apply online
- debt counselling
If an individual has a property which is worth more than the mortgage and other debts secured against it, this excess amount is know as equity. It is possible to release this equity to raise a lump sum of cash that can be used to settle outstanding debts. Similar to a consolidation loan the result is that all debts are now brought together as one larger debt, and all monthly payments are now covered by one smaller monthly payment.
How it Works
If the value of a property has gone up since purchase, or significant payments have been made into the mortgage over time, there is sometimes spare money (called equity) that can be released to raise a lump sum.
There are three main ways to release this equity:
- Further borrowing from an existing mortgage
- Re-mortgage to a new mortgage with a larger borrowed sum
- Keep the existing mortgage and take out a new loan secured against the equity in the property
As a guideline it can be simplest to try to apply for further borrowing from an existing lender, as they are already familiar with the individual, and they will look to be flexible as they will not want to lose an existing customer. The lender may require a revaluation of the property and a credit check, and will need all parties involved in the mortgage to sign for the increased borrowing. Once approved, a lump sum will be paid to the borrower and the monthly mortgage payments will be increased to reflect the higher borrowed sum.
To re-mortgage an individual can either search around for the best deal or get a broker to do this on their behalf. Clear Start can recommend suitable re-mortgage brokers for different circumstances. This process should find one of the better deals available which will enable the individual to borrow enough money to pay off their debts.
As an example the following person remortgages to borrow £120,000 instead of £100,000. They release a lump sum of £20,000 cash to pay off their debts, but in return their monthly mortgage payments increase by £120.
| Lump Sum Cash | n/a | £20,000 |
|---|---|---|
| Monthly Mortgage Pmts | £600 | £720 | Type | Previous Mortgage | Remortgage |
| Property Value | £150,000 | £150,000 |
| Mortgage Balance | £100,000 | £120,000 |
| Equity Remaining | £50,000 | £30,000 |
A secured loan involves leaving the existing mortgage in place, and just borrowing against the remaining value in the property. The interest rates will tend to be higher for a secured loan than further borrowing or a remortgage, this is because the period of the loan tends to be shorter, and the risk is higher.
A secured loan is also known as a 'second charge'. The mortgage is the 'first charge' and has first rights to any funds released from the property under a sale, re-mortgage or repossession. As the secured loan is the 'second charge' it can then stake a claim to what it is owed next. Some companies will even lend a 'third charge', however they will tend to require a high interest rate to cover their risk.
In any event, whether further borrowing, re-mortgage or a secured loan, lenders will never release the full value of the equity. They will always leave some equity in the property to cover the event that the property decreases in value. The amount they will require to be left in will vary from around 10% to 25%, i.e. an individual can borrow up to 75-90% of the value of the property - this percentage is known as the Loan To Value ratio or LTV.
When it is Suitable
Secured lending should be considered when an individual is unable to consolidate using unsecured lending:
- When total debt is over £25,000
- When the borrowing is too high risk for unsecured lending
- Or when the monthly repayments on an unsecured loan are too expensive
| Pros | Cons |
|---|---|
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What to Look Out for
- Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
- The main difference between an unsecured and a secured loan is that under a secured loan the property is offered as a guarantee of the debt. That is to say that if the secured debt is not paid then the lender can force sale of the property in order to get their money back.
- Make sure the monthly payments are affordable. Complete a monthly budget exercise to see what funds are available each month after essential living items such as rent, bills and food, etc.
- Interest rates on secured lending can be higher than normal if a credit rating has been affected by late payments.
- Be careful not to continue to build up other types of debt such as credit cards and overdrafts. Some organisations suggest cutting up credit cards until the consolidation loan is paid off.
How to Apply
- To find out about further borrowing a borrower should contact their existing mortgage lender and enquire about 'further borrowing against an existing mortgage'.
- To find out if a re-mortgage or secured loan is the most suitable way to consolidate debts over £1,000 contact Clear Start who have a panel of preferred mortgage brokers who specialise in debt consolidation.
- If you are turned down for a re-mortgage or secured loan to consolidate debts contact Clear Start so that an alternative debt settlement solution can be set up.
To talk to an advisor about a secured lending for debt consolidation over £1,000 call 0800 138 5445, or complete the enquiry form.
To contact an advisor call 0800 138 5445. Alternatively complete an online enquiry form and an advisor will call you back at the time that you specify.