A secured loan can affect remortgaging, but having one does not automatically prevent you from switching to a new mortgage deal. The loan may affect how much you can borrow, your loan-to-value ratio and the mortgage products available to you. It will also add extra legal steps to the remortgage process.

If the secured loan is registered against your property as a second charge, you will need to decide what happens to it when you remortgage. You may be able to repay it using your new mortgage, or keep the loan in place alongside your new main mortgage. If it remains, your new mortgage lender will usually need its charge to take priority.

Here, the experts at JMW explain how a secured loan can affect remortgaging, what happens to a second charge when you change mortgage lender and how our remortgage solicitors handle the legal work involved.

What Is a Secured Loan?

A secured loan is borrowing secured against an asset, which is usually your home in a residential property context. This gives the lender security over the property until the borrowing is repaid.

Where you already have a main mortgage, a separate secured loan may be registered against the property as a second charge. Your mortgage lender usually holds the first charge, while the secured-loan lender takes the next priority.

Secured loans are also sometimes described as second charge mortgages, second mortgages or homeowner loans. Homeowners may use them to raise funds for home improvements, consolidate existing borrowing or meet other significant costs.

This differs from an unsecured loan, such as a personal loan, which is not secured against the property. An unsecured loan can still affect a future mortgage application because lenders take existing financial commitments into account, but it does not create an additional legal charge over your home.

Our guide to remortgaging for home improvements explains the differences between a full remortgage, further advance and second charge mortgage in more detail.

Can You Remortgage if You Have a Secured Loan?

You can remortgage if you have a secured loan, provided you meet the new lender’s criteria and the existing secured borrowing can be dealt with as part of the transaction.

The mortgage lender will consider your wider financial circumstances before deciding whether to offer a new mortgage, including:

• The outstanding balance on your existing mortgage.
• The amount remaining on the secured loan.
• Your income and existing monthly repayments.
• How much equity you have in the property.
• Your credit history and credit file.
• The amount you want to borrow under the new mortgage.
• The lender’s own affordability and lending criteria.

Having a large secured loan can reduce the amount of equity available in the property and increase your overall monthly commitments. This will affect how much a lender allows you to borrow, and the mortgage deals you can access.

The position also depends on what you want to do with the secured loan. You may want to borrow enough under the new mortgage to repay both existing loans, or you may prefer to keep the secured loan in place alongside your new mortgage.

How Does a Secured Loan Affect Your Remortgage Options?

A secured loan will affect your remortgage because a new lender will look at both the value of your property and your wider financial position.

Some of the main considerations include:

• Loan-to-value ratio: Your loan-to-value (LTV) ratio compares the mortgage borrowing with the value of your property. If you want to increase the new mortgage to clear a secured loan, this may place you in a higher LTV band. Lenders set their own LTV limits and mortgage rates for different products. Use this LTV calculator to work out your loan-to-value (LTV) ratio.
• Available equity: The difference between your property’s value and the borrowing secured against it will influence your options. If your overall borrowing is close to the value of the property, you may have fewer remortgage options. If your mortgage debt exceeds the property's value, read our guide to remortgaging with negative equity.
• Affordability: A lender will consider your income, expenditure and existing monthly repayments when assessing a new mortgage application. Having two secured loans means you have two separate repayment commitments if both will remain after completion.
• Credit history: Your credit score and credit history can affect the mortgage products and interest rates available. Missed payments on either the main mortgage or secured loan may also appear on your credit file.
• Additional borrowing: If you want the new mortgage to cover the current mortgage and secured loan, you are asking the lender to advance more money. The lender will assess whether this level of borrowing meets its criteria.

A mortgage broker or financial adviser can help you compare mortgage rates, products and the financial implications of changing your borrowing. Our role as conveyancing solicitors is to handle the legal work required once you move ahead with the remortgage.

What Happens to a Secured Loan When You Remortgage?

When you remortgage, an existing secured loan will generally either be repaid or remain secured against your property alongside the new mortgage.

Which route applies will affect the legal work required.

Repaying the secured loan through the remortgage

You may decide to take out a new mortgage large enough to repay both your existing mortgage and the secured loan.

For example, if you have £180,000 outstanding on your main mortgage and £20,000 remaining on a secured loan, you may apply for a new mortgage that covers both debts, subject to the new lender’s affordability and LTV criteria.

If the new mortgage completes on this basis, your solicitor will obtain the necessary redemption figures and arrange for the relevant existing borrowing to be repaid. The existing charges can then be discharged from the title and the new mortgage lender’s charge registered against the property. HM Land Registry has specific procedures for discharging registered charges during transactions such as a remortgage.

This may leave you with one mortgage rather than separate payments to your primary mortgage lender and secured-loan lender.

However, combining borrowing does not automatically make it cheaper. Increasing the size or term of your mortgage may result in you paying interest over a longer period. Early repayment charges may also apply to the existing mortgage, secured loan or both. You should take financial advice before deciding whether combining the borrowing is suitable.

Keeping the secured loan in place

You may want to change your main mortgage lender while keeping the secured loan.

This creates an additional legal consideration because the charges registered against the property have an order of priority.

Your new main mortgage lender will usually require its charge to have the appropriate priority over the secured-loan lender’s charge. If the existing second charge remains, the secured-loan lender may therefore need to agree that its security will sit behind the new mortgage.

This can involve a deed or letter of postponement. A postponement changes or confirms the priority between charges. HM Land Registry expressly provides for the registration of a postponement by letter or deed.

Can You Combine a Secured Loan With Your Mortgage When Remortgaging?

You may be able to combine your existing mortgage and secured loan through a full remortgage. This involves taking a new mortgage large enough to repay both debts, leaving the new mortgage as the borrowing secured against the property.

For some homeowners, this can simplify their finances by replacing two payments with one. It may also allow them to replace a secured loan carrying a higher interest rate with borrowing at a different rate.

However, one monthly payment does not necessarily mean a lower overall cost.

You need to consider:

• The interest rate on the new mortgage.
• The new mortgage term.
• The size of the monthly repayments.
• Early repayment charges on the existing loans.
• Arrangement and other remortgaging fees.
• The total interest payable over the new mortgage term.

For example, moving a secured loan onto a mortgage with a much longer remaining term could mean paying interest on that borrowing for longer, even if the monthly payment falls.

If your main reason for combining borrowing is debt consolidation, read our guide to common misconceptions about remortgaging for debt consolidation.

What Costs Should You Consider?

A secured loan can introduce additional costs when you remortgage, particularly if either of your existing credit agreements includes an early repayment charge.

Depending on your circumstances, costs may include:

• An early repayment charge on your current mortgage.
• An early repayment charge or exit fee for the secured loan.
• Arrangement fees for the new mortgage.
• Property valuation fees.
• Legal fees.
• Mortgage administration or exit fees.
• Any additional legal costs associated with dealing with the second charge.

Some lenders offer remortgage products with free valuations or contributions towards legal costs, but you should compare the overall costs rather than focusing on one incentive or interest rate.

Our guide to how much it costs to remortgage in the UK explains the main fees involved in more detail.