Homeowner loan vs remortgaging: which way to raise money on your home

If you own your home and want to raise money, there are two main routes. A homeowner loan, also called a second charge mortgage, is a separate loan secured on your property that sits alongside your existing mortgage. Remortgaging means switching from one mortgage to another, either a new deal with your existing lender or a new mortgage with a different lender, and borrowing more against the value of your home¹.

The practical difference is what happens to your current mortgage. A homeowner loan leaves it alone, so you keep your existing rate. Remortgaging replaces it, which means if you are still inside a fixed or tracker period you will likely need to pay an early repayment charge³. Some mortgages are offered fee-free, while others come with fees well over £1,000⁴.

Both routes put your home at risk. If you have a mortgage or secured loan on your home and fall behind on payments, the lender could take court action to repossess your home, which could be sold to repay what you owe⁵. If the property is your home, the lender will normally need a court order⁶.

How a homeowner loan and a remortgage each raise money

A homeowner loan lets you borrow against the equity in your property without touching your main mortgage. It is a second mortgage: secured on the borrower's property, but with any claims subordinate to the first lender⁷. The Financial Conduct Authority's own glossary describes the charge you would face for repaying a mortgage early, which is the thing a homeowner loan avoids³.

Remortgaging works differently. The Bank of England defines it as occurring when existing borrowers redeem their current mortgage in favour of a new one secured on the same property, but with a different mortgage lender⁸. In practice it can also mean a new deal with your existing lender⁹. Remortgaging can improve your situation in two ways: releasing equity, where you take a lump sum from the value of your home, or reducing your monthly mortgage payment¹.

The amount you can borrow depends on things like your credit score, your income and outgoings, and the value of the home¹⁰. In Scotland, the home report valuation is usually the maximum amount you can borrow with a mortgage¹¹.

A homeowner loan lets you keep your existing mortgage rate

The clearest advantage of a homeowner loan is that your existing mortgage is untouched. Fixed-rate mortgages are the most common type of loan taken out by homebuyers and by homeowners remortgaging¹², and if you are inside a fixed period, keeping that deal avoids the charge for breaking it.

That matters because fixed rates move. Fixed rates for first-time buyers and home movers have seen small rises over the period since the start of August¹³. If your current deal is better than what is available now, replacing it through a remortgage means giving it up.

A homeowner loan also spreads the new borrowing over its own term, separate from your mortgage. The trade-off is that you are adding a second secured debt to your home, and the second lender's claim ranks behind the first⁷. If you fell behind and the home were sold to repay debts, your mortgage would be paid off first¹⁴.

There is a related arrangement worth knowing about if you are moving rather than raising cash: a let-to-buy mortgage, which involves having two mortgages at the same time, a buy-to-let mortgage on the existing home and a standard residential mortgage on the new home¹⁵. If you want to move but cannot sell, a let-to-buy arrangement is one option¹⁴.

Early repayment charges: the cost of remortgaging before your deal ends

An early repayment charge is a charge levied by the mortgage lender on the customer in the event that the amount of the loan is repaid in full or in part before a date or event specified in the contract³. If you remortgage during the initial fixed or tracker period of your mortgage, then you will likely need to pay an early repayment charge².

This is the single biggest reason a homeowner loan can work out cheaper in the short term. Remortgaging during your fixed term means you will need to pay charges to your lender⁴. There is often an early redemption fee if you remortgage early¹.

The same charge can bite when you sell. If you are still within your existing mortgage term, there may be early repayment charges for breaking the deal or fees to take it with you to a new property¹⁶. An early repayment charge can apply if you are still in the introductory period of your mortgage when selling your home to pay off the mortgage¹².

Costs and fees on each route

Fees are where the two routes diverge most, and where the headline rate can mislead. Some mortgages are offered fee-free, while others come with fees well over £1,000⁴. Just 10% of residential mortgages have more than one upfront fee, according to Moneyfacts data checked on 12 August¹⁹.

Adding a fee to the loan rather than paying it upfront costs more over time. In one remortgage example over a two-year term, adding the fee to the loan meant paying an additional £480²⁰.

A homeowner loan carries its own arrangement fees and its own interest rate, which is typically higher than a first mortgage because the lender's claim ranks behind⁷. Remortgaging usually means one set of fees rather than two, but the early repayment charge can outweigh that saving if you are mid-deal.

Who can get a homeowner loan or a remortgage

Both routes need equity in your home and a credit record a lender will accept. A mortgage lender will base your application on several things including your credit file, the value of your house, and how much you want to borrow¹. The amount you can borrow depends on your credit score, your income and outgoings, and the value of the home¹⁰.

If you are in arrears with your mortgage or any other debts, your credit rating will be affected and it is unlikely you will get a good mortgage offer¹. Mortgage arrears will put a mark on your credit record and may prevent you from buying a house in the future²¹.

There are specific rules if you bought through Help to Buy. The government will only allow you to remortgage and borrow more money to pay back part or all of your equity loan, to make structural alterations when you have permission, or to fund a transfer of equity²². If you intend to borrow more on your repayment mortgage when you change the homeowners, you must have a mortgage offer or funds in place before you apply²³. The homeowners named on the equity loan must be the same as those on the repayment mortgage²³.

If you are a homeowner getting certain benefits, you could get help towards interest payments on your mortgage through Support for Mortgage Interest²⁴. Homeowners on certain benefits may be able to get help towards mortgage interest payments under this scheme²⁶.

Risks to your home and where to get help

Both routes are secured on your home, and that is the risk that matters. If you do not pay what you owe, you are at risk of your house being repossessed²⁷. If you miss your mortgage repayments and cannot agree a repayment plan, your mortgage lender might start court action to repossess your home²⁸. If the property is your home, they will normally need a court order to do this⁶.

A secured consolidation loan turns the debt into a second mortgage on your home and puts it at risk. Your home can be repossessed if you cannot keep up the payments²⁹. If you get a loan, do not get a loan that is linked to your home, like a mortgage, because you might lose your home if you cannot pay it back³⁰.

Remortgaging to pay off debt carries its own risks: longer repayment terms, securing the mortgage against your home, and more interest to repay in total³¹. Taking out a loan means taking out more credit, which could affect your credit score³².

Free, impartial help is available. StepChange, National Debtline, Citizens Advice and Shelter all offer debt advice at no cost³⁵. If you are in Scotland, the Home Owners' Support Fund offers two types of help: the Mortgage to Rent scheme and the Mortgage to Shared Equity scheme³⁶. Mortgage to Rent allows the local council or a housing association to buy your home³⁶. In Northern Ireland, homeowners on certain benefits may be able to get help towards mortgage interest payments through Support for Mortgage Interest²⁶.

If you are behind on a credit card as well, there is separate help for that³⁷. If you own your home with a mortgage, you may be able to apply for a Support for Mortgage Interest Loan for help with the mortgage interest²⁵.