Loan: increase mortgage or get from bank?

Mrs_Trellis_4

Hi,
1st posting here. Need £8-9k to purchase garage. Wondering whether to take out extra mortgage or get straight loan. Banks seem reluctant to say what the penalty would be for paying off early - which hope to do as other half hoping to retire before loan would be paid off. Then would pay with lump sum he receives on retirement. Any thoughts? It would be unsecured loan (as advised on this website) with no PP1.

[Deleted User]

If you take out a mortgage, or increase an existing one to give you the money to buy the garage this means that if you default, your home (or just the garage if the mortgage is only on that) is at risk.

A mortgage will have lower interest and depending upon the product you choose, you can stipulate over what term you want to pay it back. However - if the mortgage is just for the garage and nothing else you may have trouble finding a lender that will lend such a small amount as a mortgage, and especially as a garage is not a dwelling.

If you go for an unsecured loan the interest rate will be higher but again you can usually choose over what term you want to pay it back.

There will be penalties on both options for early repayment - but these should be clearly stipulated in the small print and you should be clear about them BEFORE you sign.

Do not accept any loan if you do not understand the product or if the lender is reluctant to fully answer your questions. Make sure you DO ask questions and be sure to see a copy of the terms and conditions.

Phonix

I know this isn't very helpful but why not save up some money to buy the garage?

Are you buying the whole thing with a loan?

If you can afford to pay the interest charges for the loan, you should be able to afford to save up each month for the following year for this garage and use the money to reduce the amount borrowed.

Is it a case of you need the garage really quickly and can't live without it?

If you want to save money the best thing to do imo is actually save it

mrcow

Hi Mrs Trellis,

What sort of time period were you considering for the loan? If it's very short term, then I think that the unsecured route may be best, or you could even look at getting a couple of credit cards, spending on one of them and then balance transfering to another at 0% APR (you'd be what's know as a credit card tart, see credit card section) or even getting a card that would allow a super balance transfer to your bank account at 0% (eg. the Virgin card).

An alternative would to be to look at a low interest for life of balance card (look on credit card section for current deals).

Both of the above options would be cheaper in terms of interest paid than either an unsecured or a secured loan. The advantages would be that you are entirely flexible and in control of the repayments (and also they would have no early repayment penalties and no set up charges if you do it right).

The disadvantage is that it take discipline to pay off the balance, and you may have to switch cards a couple of time to pay the debt off in full (we financed our kitchen at 0% in this way).

It will also depend on your credit rating, if it's good, would you be able to get enough credit limit on a card to cover the £8/9k?

If you're choosing an unsecured loan, then with Egg or Cahoot there are no ERCs and they won't force PPI down your throats!

Adding to your mortgage would probably give you a lower APR (I'd hope!!!) if your lender is happy to do this, but you need to ensure:

1. That you are allowed to make overpayments to pay this part of the loan off early

2. That you are aware of any set up charges (are they going to make you redeem your existing mortage and set up a new one? or can you just add a sub account? will they require another survey? etc etc.)

3. That you are EXTREMELY disciplined with this. It would be so easy to take the extra out on the mortgage and just pay it off according to the schedule. But this way, you'll probably end up paying more in interest than on an unsecured loan with a higher APR over a shorter time period.

4. Are there going to be any penalties for paying off part of your mortgage early (there isn't usually, but it will be in your T&Cs)

5. Is revising your exisiting mortgage something that is right for you right now? Are you already on an exisiting deal? If so, are there penalties for changing it? Or is adding to your mortage right now going to prevent you from seeking out a better deal in the near future? (Is it going to tie your hands?) If you are not on any current deals with tie ins, then it may be worth taking a look at the remortgage guide written by Martin Lewis. There's always money to save


Sorry for the essay (not really!)

mrcow

Mrs_Trellis_4

Hi again, thanks so much for replying, it's really helpful. Sorry, didn't explain fully, shouldn't have mentioned the garage but didn't want advice on car loans etc.

The reason for the loan is irrelevant, it's just cash we need.
Apart from the fact it would take me a long time to save the money:
1. the garage is already there, if we don't buy it now there's very little chance of another one coming up in the village.
2. it's in France! - we went mad & bought a little house in grotty street,
where parking nearby likely to become more difficult. So it should be
a sensible investment.. Anyway we love it so much it has to be worth it.
Borrowed the money from the Derbyshire BS or the house, as have equity
in UK house. They would lend us the extra cash on a variable or fixed rate
(min. 5 yrs) If variable, then no early repayment penalty. But of course, that would be a secured loan. Will probably have to sell the house before we retire anyway - no way we could afford the repayments on a tiny pension.

Robert_Sterling_3

Mrs_Trellis wrote:

Will probably have to sell the house before we retire anyway - no way we could afford the repayments on a tiny pension.

You mean the House/Garage in France I guess.

Mrs_Trellis_4

No, I meant the house in England as we won't be able to afford the mortgage on a pension whereas we actually own the one in France (hence the mortgage here!)
I have checked out Nationwide and they have a pretty good standard rate of loan 6.7% I think, no penalty for paying off early so I think we'll go with them