The Pros & Cons: Short term personal loan vs a remortgage
When you are in need of some extra funds one of the first questions you may ask yourself is, “is it more beneficial to take out a personal loan or add it to my mortgage?” In this guide, we will show the pros and cons of both available options.
The choice between a short term personal loan and remortgage fully depends on the term and interest rates offered. The shorter the term the less interest you will repay therefore it often makes sense to consider the loan option first.
Make sure you read the rest of this guide as we will cover every angle and give you a more clear decision that is right for you.
How much could I borrow with an unsecured loan?
The maximum possible amount you can borrow for an unsecured loan is £25,000 and the maximum term is 10 years. This is often a good starting point and if you need to borrow more than £25,000 you will need to consider a secured loan or adding it to your mortgage.
How much could I borrow with a secured loan?
This will be dependent on the value of your property. There is no maximum amount you can borrow however most loan companies will only lend up to 80% of the value of your home. You will be able to have a longer term than you would on any personal loans meaning the monthly payments are likely to be lower.
The lender will want you to pay for a valuation of your home. Once they receive the valuation back will use this to determine the percentage they are willing to lend you on this.
How much could I borrow if I added it to my mortgage?
The mortgage lender will make a decision based on two factors. Firstly your income and secondly the overall loan to value (LTV). The lender will want to see your last 3 months payslips to enable them to work out your borrowing capacity. Most lenders will be able to calculate the value of your home by carrying out a desktop valuation.
The lender will want to know the reason for releasing extra funds. If you are raising for home improvements then they may lend you more than if you were planning on paying or credit cards or other debts.
What are the additional costs I may need to pay?
The amount of the overall costs will depend on what you are taking out. This is why would advise that you take your time to really understand what these costs are and how they can add up.
- Unsecured Loan – These can also be known as a personal loan. There doesn’t tend to be many costs involved with taking out an unsecured loan however you may find the interest rates could be higher.
- Secured Loan – The setup costs with a secured loan do tend to be the highest of all the options. These can include valuation fees, administrative fees and set up fees. However, as there is less risk to the lender because the debt is secured against your home you will find you are likely to achieve a lower interest rate than a secured loan which could appeal if you are wanting a larger amount.
- Adding to your mortgage – The setup costs of adding to your existing mortgage tend to be the lowest of all three options. Once again you need to keep in mind that your mortgage is secured against your home. Although you are likely to achieve the lowest rates of three options, the interest rate is likely to increase over time if mortgage interest rates increase.
Which option is going to be best for me?
The only way to really know this is to get advice. Speak to a mortgage broker that will be able to look at all 3 options open to you. You will then be able to compare the monthly payments, interest rates and the upfront costs on all 3 options to help you achieve the best mortgage rate and deal with the most suited lender.
Paying too much for your mortgage?
Chances are you could save money with a better rate
Saving money today is more important!
If you are more concerned about keeping your monthly outgoings low at present then the remortgage is likely to be the way to go. However, you also need to realise that because the amount you will be adding to your mortgage will be the same term as your mortgage, if you have a long time left on your mortgage this could be more costly!
What do you need the extra funds for?
Although this will make no difference to the cost it is a good question to ask yourself! For example, if you are wanting to buy a car it makes no sense adding to your mortgage over a long term on a car that will only depreciate in value! However, if you are borrowing money to spend on your home, for example, an extension or fitting a new bathroom or kitchen or any type of home improvement then it makes more sense to add this to your mortgage. This is because you would be using the money to increase the value of your home. Lenders nearly always support extra funds for home improvements on your property. This is because the home improvements work towards increasing the overall value of the mortgaged property.
Is it a good idea to remortgage to pay off debt?
Again get good financial advice because paying off personal loans and other debts can save you a lot of money by lowering your monthly payments however it really depends on the term and the rate. For example, adding any personal loans with a 5 years left on it to a mortgage that has 20 years left will end up being an expensive decision in the long term even though it may ease your short-term monthly finances.
If you are getting a lower interest rate on the new mortgage deal and the term on the personal loan and mortgage are about the same then this makes sense. Again make sure you get sound financial advice from a mortgage consultant, mortgage advisor or mortgage broker. They will be able to achieve your best available rate on the market.
Which loan is right for me?
It is very difficult to know which option is best without knowing all the factors involved. Different rates and deals are available depending on each individual suitability. This is why we would highly recommend getting advice!
The answer is always YesCanDo…
YesCanDo Money are mortgage brokers based on the south coast of the UK, with over 30 years of experience and a team of 15 advisers and professionals. We do not charge for our advice and we do not charge for our services. If you would like a chat to see which of the options will be right for you, feel free to contact on WhatsApp or email or give us a call!
Frequently Asked Questions
Will the length of the term make a difference?
Yes, the length of the term will make a big difference! The longer the term the more interest you will end up paying but it will also make the monthly payment lower.
Also, the term left on your mortgage will make a big difference. If you have short term left on your mortgage it may make more sense to add the loan to your mortgage as you will pay less interest. However, this will also mean your monthly payments will be higher.
I’m about to remortgage. Is this the best time to sort out a loan?
Yes, if you decide your best option is to add an amount to your existing mortgage then the best time is when you naturally come to remortgage. If you were remortgaging to a new rate anyway then this will be at no extra cost to you.
Is it better to have a shorter term mortgage?
The shorter your mortgage term the less interest you will pay over the term and therefore you will save money in the long run. Although your monthly repayments will be higher.
Is it better to have a longer term mortgage? The longer your term is the less your monthly repayments will be. However, you will end up paying far more in interest over the term as the rate will be higher.
Can you remortgage to a shorter term?
Yes, this is more than likely possible and also a great idea. When you remortgage its a great time to look at everything to do with your mortgage including the interest rate and the term. If you can reduce the term by even five years you would be amazed at the amount of interest you will save. The monthly repayments will increase and therefore the lenders will want to check that you can afford the higher monthly repayments. This will be worked out with their affordability calculator.
Are Mortgage Advisors and Brokers regulated? – All Brokers in the UK are authorised and regulated by the financial conduct authority.