If you are thinking of remortgaging your property and are wondering if a loan that you have taken out will affect this application then the answer is yes.
As you are no doubt aware from when you initially took out your mortgage, banks and other mortgage providers calculate the amount you can borrow based on an affordability assessment resulting in the provision of your loan to income ratio. Personal loan repayments will be accounted for in your monthly outgoings, and if these repayments make your monthly outgoings so high that it causes a significant decrease in your income then you will be in a bad place when applying for a mortgage or a remortgage.
Personal loans are taken against your credit score, meaning that if you miss any repayments then you could also be damaging your credit rating which would then lead to you receiving worse offers from, or even being refused by, mortgage providers.
However, just because you have a personal loan that you have to repay does not necessarily mean that you will be in a tough position financially.
Personal loans account for anything up to £35,000, so if you have only borrowed a small sum and the repayments do not eat into your monthly income too much then it is likely that this will not affect your loan to income ratio and your remortgage application will not be affected.
Likewise, you may find that making regular repayments to a personal loan amount can increase your credit score over time which may result in you receiving better offers from mortgage providers either at the start of your mortgage application or when you apply for a remortgage.
Depending on your personal circumstances, you may want to hold off on taking out a personal loan and assess your options for borrowing a cash sum depending on the intent for the loan, especially if you have been making mortgage repayments for some time.
What is a Remortgage?
Remortgaging is a very popular form of home loan, with approximately one third of all home loans in the UK being remortgages. You can remortgage your property by replacing your current mortgage, either with a new lender or on a better deal with the same lender, or by taking out a new home loan against your property.
When you first sign a mortgage agreement, you will likely be placed on a fixed rate or discount mortgage rate. This usually only lasts for a few years, with two to five years being the average. After this deal ends, the lender will usually place you on their standard variable rate (SVR) which is often higher, or much higher, than their discounted interest rate. It is when these deals end that Remortgaging can be a very wise decision. Be sure to plan to remortgage at least 14 weeks in advance to avoid being placed on your lenders SVR.
But remortgaging can also be a good choice when you have accrued more equity in your property, regardless of your mortgage deal. Depending on your initial deposit amount and loan to value (LTV) ratio, simply keeping up with your mortgage payments for a few years can mean your LTV has fallen. Then, submitting a remortgage application can often yield much better rates, making your monthly payments lower.
Similarly, if you find that the market value of your home has risen then this can also push you into a lower LTV band when applying for a remortgage, which will only be exacerbated by the length of time that you have been making payments for.
Some people wait for this increase in equity to decide when to move home. By selling your property that you now have more equity in, you have released the funds and can either cash in on them by purchasing a lower value property or you can fund a larger deposit amount for a higher value property.
If you have decided that you are set on staying in the same property, then a remortgage to release equity can be beneficial if you need cash to make home improvements or pay off any personal debts.
Mortgage loans taken via remortgaging can be from as little as £5000, yet the interest rate is often higher than an equivalent personal loan.
Just be sure to familiarise yourself with your mortgage agreement in case there are any fees or penalties for remortgaging that may make the process unproductive – for example, fixed rate mortgages often include fees for leaving before the fixed rate ends.
Personal Loan or Remortgage Loan?
Personal loans, as opposed to secured loans like mortgages, are not secured against your assets, instead they are held against your personal credit rating. This makes them a suitable choice for people not wanting to risk the repossession of their home.
As discussed above, personal loans allow you to borrow an amount of up to £35,000 and they need to be repaid between a period of one to five/seven years. Interest rates for personal loans are commonly much higher than the interest rates for mortgage loans, meaning that you will be making higher monthly repayments to clear your debt than you would be with a mortgage loan. However, as you are making repayments for a significantly shorter period of time than you would be with a mortgage loan (between one to five years compared with fifteen to twenty years), it is highly likely that you will end up spending less in interest.
So, if you can afford to make the higher monthly repayments then consider a personal loan to save money over the long term. Furthermore, applying for a personal loan can be a much faster process than remortgaging, so if you feel like you need access to funds quite quickly, personal loans will work to your favour.
Therefore, depending on the interest rates offered, the amount borrowed, and the length of time left on your mortgage, taking cash out through a remortgage can work out much more expensive than taking a personal loan as you will be repaying the interest for a much longer period.
Does having a secured loan affect remortgaging?
A secured loan is a loan that uses your property as collateral. When the property used as collateral is your home they are sometimes referred to as ‘homeowner loans’.
If you have a secured loan on your property you can still remortgage. Remortgaging when you have a secured loan is still a good decision if your mortgage deal is coming to an end and you are about to be placed on a standard variable rate.
You may even decide to remortgage for a larger amount so you can clear the secured loan completely, or keep paying your monthly payments separately to your mortgage.
If you have a mortgage and are looking to take out some form of secured loan then you have a few options you can choose from.
You may be able to apply for a further advance from your current mortgage provider if you have enough equity in your home. Your mortgage provider will then increase your monthly payments to account for this loan.
Secured loans that are held separately to your mortgage are called second charge loans. You will have to make two sets of monthly payments that are both secured against your home. In the event that you sell your home, your mortgage is cleared first and your secured loan is cleared second.
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