Mortgage lenders are now offering loans from as little as £5,000 as competition in the market continues to heat up. Research by Moneyfacts.co.uk shows that 520 mortgage products now allow for either minimum loans of £5,000 or £10,000. Meanwhile, those at the other end of the spectrum requiring a loan of £1m or more have 111 products to choose from. The greatest number of products available is for those looking to borrow a minimum of £25,000, accounting for 42% of available products.
Competition is not only fierce in the mortgage market, but also in the personal loans sector too. But, should you use your mortgage to borrow smaller sums such as £5,000?
If you were looking to borrow £5,000 over a two-year term, the best rate for a two-year fixed rate remortgage – that has the option to be paid back in two years or fewer – on a property valued at £300,000 at a maximum 50% loan-to-value is 1.55% fixed to 30 September 2021, on offer from Coventry Building Society. There is a product fee of £999 and the APRC is 38.6%. This means that for a two-year term, in total you would repay £6,400.04.
If you instead compare this to the best personal loan rate for the same amount and time period (£5,000 over a two-year term) – currently from Zopa at 3.3% APR –) you would repay £5,171.04. This loan also comes with a £10 borrowing fee, meaning you would pay a total of £5,181.04. Significantly, this is £1,219 less than if you were to opt for the first example of a two-year fixed rate remortgage. In addition to this, personal loans typically offer a much faster decision on whether you have been accepted for the loan compared to mortgage products, and you are also much likelier to receive the funds (£5,000) more quickly.
For an instant decision and same day funds, the best personal loan rate for £5,000 over a two-year term is 3.6% APR from Sainsbury’s Bank. Borrowers should note that this deal will require you to either have or apply for a Nectar Card.
Another key difference between the two is that a loan is unsecured, meaning that you do not need to provide any collateral to secure the funds, while a mortgage is secured against your home. The risk of not keeping up with mortgage repayments is the potential loss of your home.
Michelle Monck, personal finance expert, Moneyfacts.co.uk, said “If you need short-term borrowing of a few years and are looking to borrow less than £50,000, it is usually more cost-effective to take out a personal loan. If you need to borrow more than this sum, and want to spread the payments over a longer term such as five years or more, then remortgaging your property would typically be more cost-effective.
“Depending on your circumstances, if remortgaging is not possible with your existing lender, then a secured loan may be a suitable alternative. In all cases, you should consider if you really need the loan, make sure you can afford the monthly payments and have a plan what you would do with the loan should your circumstances change in the future.”
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.