There are lots of ways we can source borrowing money, but most of us turn to the same option time and time again. Whether it is a credit card, a personal loan, the ‘bank of mum and dad’ or your mortgage lender, the majority of us are creatures of habit and turn to the same solution whenever we need to borrow money.
In reality, you should look into all of the various options whenever you need to obtain funds, because your situation and requirements will be different each time.
If it is available and it doesn’t cause them any problems, the ‘bank of mum and dad’ is usually the best way to borrow money because they will often charge a low, or zero rate of interest. Some of them don’t mind how and when they get it back.
Credit cards can be a good solution if you are borrowing a small amount which you can repay quickly. Too often this is the most popular route for many borrowers because it is easy and the credit card companies tempt us with a zero percent interest rate for a short time. The trouble is, they rely on you not paying them back when you plan to, and letting the interest rate shoot up. When used in this unsuitable way, I put them in the same type of category as pay day loans, because they can be costly and dangerous.
If you want to pay the money back monthly and can afford the repayments over a short period of time, a personal loan can be a reasonable option because they let you pay back the money in instalments and there are usually no set-up fees. However, the potential issues with personal loans are that they can sometimes have high interest rates, and due to having to pay the money back over a short period, the monthly repayments can be unaffordable.
Releasing equity from your home can be a better option, because you can repay the money over a longer period of time. This can be beneficial as your total outgoings may not increase as much as they would with other types of finance. There are a few sub-options which you would need to explore here. The obvious one is a remortgage, but this isn’t always possible or can end up expensive if you have to give up your low interest rate, or pay an early repayment charge.
Sub-option two is to ask your existing lender for more money. In order to do this, you need to be with a provider who is still lending money and fit their current criteria.
The last option is a not as readily known, called a second charge. This is a separate loan with a different lender, which is secured against your property, whilst allowing your existing mortgage to remain in place. They will usually allow you to spread the cost over the term of your mortgage or even longer, so that the monthly repayments are more affordable.
For example, if you own a property worth £100,000 and have a mortgage of £60,000 with ABC building society with an ultra low 0.5% interest rate which you don’t want to lose, and you have asked them for more money, but they won’t assist. You can then ask XYZ bank to lend you say £20,000 secured against your property, to take the total borrowings against your property to £80,000. So the amount you owe here would be the same as other mortgage options, but you owe some money to one party, and the rest to another.
You should pick the right horse for the right course. If you are always choosing the same option when obtaining finance, it is likely you are doing yourself an injustice and you could find something more suitable if you seek the right advice.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
24th November 2014
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