Remortgage or Second Mortgage?

29/01/2020

Taking out a mortgage of any sort is often one of the biggest financial commitments a person will take, making them officially a homeowner and responsible for monthly repayments for a considerably long period of time. For those who are not happy with their current mortgage rate, it is always worth considering the increasingly popular option of remortgaging, which can help to reduce monthly payments and free up some of a homeowner’s monthly wage.

What is Remortgaging?

Remortgaging refers to the process of moving from your current mortgage deal onto a new one. Those who decide to remortgage either move to another deal with their current lender, or switch to a deal with a new lender altogether. Mortgage holders who remortgage typically do so to get a better deal to then lower their monthly repayments. However, this is not the only reason homeowners decide to remortgage.

Why Do People Remortgage?

There are many different reasons why people decide to remortgage their property, all surrounding the want for a deal that better suits their situation. Some of the main reasons people decide to remortgage include the following:

  • They want to borrow more money
  • Reducing monthly payments
  • Have the freedom to make overpayments
  • Their current deal is about to end

Some people are tempted to consolidate debt through a remortgage; however, this could result in the homeowners repaying a significant amount more on their mortgage overall. It’s important to carefully consider the reasons why you are wanting to remortgage, and the impact this could have on your future financial situation, before deciding to go through with the switch.

When is Remortgaging a Good Idea?

One of the best times to remortgage is when your current deal is about to end, ensuring a nice, clean transition onto the new mortgage deal. When switching to a new mortgage deal, it can be useful to check whether you can be switched onto a new rate with the current provider, and if not, how much any exit fees would cost.

When looking to remortgage, it can be useful to explore the best deals out there via comparison websites. These sites can help homeowners to explore a whole host of different remortgaging options, taking their details into account to find the most accommodating deals for their particular circumstances. 

Remortgaging Vs Second Mortgages

A second mortgage, commonly known as a ‘second charge mortgage,’ is a loan that is secured against a property and the equity it currently holds. It can be used for a variety of different occasions, including paying off existing debts, funding home improvements, paying for school fees or even to expand a business.

A second mortgage can often range from anything between £10,000 to £2.5 million, typically spread out from 3 to 25 years. Second charge mortgages can be extremely diverse and offer an incredibly accommodating range of deals to suit the needs for many different situations.

Second mortgages can be great for those who want to keep their current mortgage deal in place, whilst still gaining access to funds secured against the property. Situations where a second mortgage can be a better fit than a remortgage, helping you to choose the option that best accommodates for your financing needs are many and there is no ‘ideal’ circumstance.

When Is a Second Mortgage a Good Idea?

Whilst remortgaging can help borrowers to lower the rates on their current mortgage deal, when this is not the priority, and you are more so looking to access finance, for example to facilitate home improvements to a UK property, a second charge mortgage could be the better option.

Second charge mortgages can be a great option for those who can’t find a better deal on their mortgage, but still want to access finance secured against their property. Remortgaging can come with early repayment charges too, that can often be quite costly. A second mortgage can help borrowers to get the funding they need whilst not having to pay for early repayment charges. Additionally, some second charge mortgage lenders are able to lend more than those who offer remortgages. Some second mortgage lenders can consider loans that are 6 times the borrower’s income, whereas remortgage lenders typically offer a maximum loan that is 4 times this income.

Why Would You Take Out a Second Mortgage?

Essentially, a second charge mortgage offers more flexibility in areas where traditional mortgage lenders and the high street lenders tend to apply blanket rules and tick-box exercises when it comes to their underwriting processes. This can be a very frustrating situation if your application for the mortgage you want and need is not considered straightforward, for example if you are self-employed.

Alternatively, a second mortgage may be preferable in cases where a mortgage holder has a low intrest rate; fixed rate or tracker first charge mortgage that they want to stay on. Applying for a remortgage with ther current lender or a new one in such situations may well result in losing the competitive rate they already have. A second charge loan however, will allow the homepwner seeking additional funds to keep their original first charge mortgage deal and arrange the additional funds separately.

Avoiding Early Repayment Charges With a Second Mortgage

Early repayment charges can be high and may be incurred when settling your initial mortgage agreement with the lender. A second charge on the property however, would mean that these charges can be altogether avoided and allow you to raise the much-needed funds separately.

Keeping an Interest Only Mortgage

There are very few lenders in the present day who will consider offering any interest only remortgage deals to borowers and homepwners. Second charge mortgages though could enable you to maintain your existing interest only mortgage, whilst being able to unlock the necessary funds required.

Are Second Mortgages More Affordable?

Some second charge mortgage lenders can go as far as to consider lending up to six times your income, whereas remortgage lenders tend to only offer up to 4 times your income; a clear disparity between the two financial options. In all cases though, lenders we will carry out detailed income and expenditure assessments, taking into account potential mortgage rate increases to try and establish your overall affordability for the loan in question, not only in the present, but for the future too, with any mortgage, or loan secured against your property being a huge financial commitment.

Different Types of Mortgages

Mortgage lenders and providers will often offer attractive mortgage deals to entice people in, to borrow from them in the first instance. However, these initial deals typically only last for a few years before borrowers are placed onto the Standard Variable Rate (SVR). Borrowers will stay on this SVR until their mortgage is repaid or they switch [remortgage] on to another deal.

All UK mortgages fall under one of the two categories below:

Variable Rate Mortgages – With this type of mortgage, the interest charged can vary. Some variable rate mortgages follow the same rise and falls of the Bank of England’s base rate (e.g. tracker mortgages). So sometimes these home loans can make monthly repayments cheaper, and sometimes they can make them higher, dependent on how the rate varies.

Fixed Rate Mortgages – With this type of mortgage the interest rate will stay exactly the same throughout the entirety of the deal. This can help home owners to ensure that the interest rates on their mortgage stays the same for a certain period of time. Whilst this ensures rates will not increase past the stated amount, if does mean that they also cannot lower during this period.

Within these two categories are a range of different mortgages to consider, accommodating for homeowners with a variety of different wants and needs from the remortgage package they ultimately select.

As a mortgage is secured against your home, your home could be repossessed if you do not keep up the mortgage repayments. Think carefully before securing other debts against your home.

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