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Ray
Boulger looks at the options a number of your clients may be looking at to
secure extra funds
One
school of thought is that because raising funds by
remortgaging extends
the borrowing over a longer period, an
unsecured loan, despite being
charged at a higher rate of interest than a mortgage, is cheaper for
borrowers who need to raise money. There are circumstances when an
unsecured loan or
second-charge will be better value than a
remortgage or
a further advance, such as when a borrower has incurred some
adverse
credit after taking out their mortgage. However this article will assume
the borrower has a continuing good credit record.
Repayment periods
It
is of course true that paying off a loan at mortgage rates over 25 years
will cost more in interest than if the same amount was borrowed at
unsecured loan rates over 5 years. But as we all know, despite what many
people still think, a mortgage doesn’t have to be for 25 years.
Money is like any other commodity – the more you want and the longer you
want it, the more it costs. Borrowers usually decide an acceptable
repayment period for a loan by looking at the monthly payments but often,
subject to their age, select 25 years for their mortgage term without
giving it any thought. However, if the same amount is borrowed by adding
it to a mortgage instead of as an unsecured loan and the monthly payments
on the mortgage are then increased by whatever the payments would have
been on the unsecured loan, this extra borrowing will be repaid sooner and
hence cost less.
Gap closing
However, over the last few years competition, coupled with the rate
comparisons that are now available on several internet sites, has resulted
in a significant reduction in the rate charged on the most competitive
unsecured loans. So much so that the gap between the more expensive
mainstream lenders’ SVRs and the
cheapest unsecured loan is now less than
1 per cent.
Logic would suggest that second-charge loans should be cheaper than
unsecured loans. However, although unsecured loans now start at 6.5 per
cent, second-charge loans generally start around 7.7 per cent. There are
lots of companies heavily promoting second-charge loans, typically for
debt consolidation, but relatively few lenders. The impression given of
lots of competition is an illusion as a few lenders control most of the
market, often trading under more than one name and offering the same
product at different APRs.
Using their home
With
the growth of offset and other fully
flexible mortgages
the more
sophisticated borrowers will increasingly realise their home can be a very
useful financial planning tool. Spare funds can be used efficiently to
reduce the mortgage but nevertheless still be available when required.
Additional borrowing is available at mortgage rates when required. As more
lenders offer offset mortgages competition will increase, with the
inevitable impact on rates. This will make an offset mortgage good value
for more borrowers, which will increase demand, which will mean more
lenders enter the market. In a few years time the offset mortgage could
well be as mainstream a product as the normal flexible mortgage is today.
Ray Boulger is senior technical manager at Charcol
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