Comparing secured, bridging, business, development, buy to let, unsecured loans and mortgages
You need to be totally sure that you choose the right type of loan to suit you. Here’s our guide to help you understand the differences between all the different types of loans that are available.
Also known as secured loans, homeowner loans and second charge mortgages
Second mortgages are guaranteed against your property
When you take out a second mortgage, you’re promising to use your property to pay the money back if you can’t repay it in the normal way. That’s why second mortgages are usually aimed at homeowners who want to borrow relatively large amounts (£15,000 – £250,000 typically).
Second mortgages are not dependent on your credit rating
Banks and other lenders can be more willing to lend if you offer security, which means these types of loan can work for you whether your credit rating is good, or not-so-good. The amount you can borrow, the repayment term and the interest rate depend on your circumstances, including the amount of equity you have in your property.
You can borrow more
Second mortgages are usually for amounts between £15,000 and £250,000. They are often called ‘second mortgages’. Remember, they are separate from the mortgage on your home which means any mortgage deals you have in place aren’t affected.
You can arrange different payment terms
The loan is not linked to your mortgage, so you have the flexibility to structure it the way you want.
Help ‘bridge’ a gap in finances
Bridging loans are designed to help if you have a gap in your finances that you need to fill. For example if there is a time difference between buying a house and selling yours. You might have found the perfect property to buy and you need to act fast to snap it up before someone else does, but because you haven’t sold your house yet you don’t have the money to complete the purchase. That’s exactly what these loans are for – to ‘bridge’ this gap in your finances. Bridging loans can be used by both businesses and individuals.
You can borrow very high amounts
As long as you can prove that the finance to repay the loan is pending, there is virtually no limit to the amount you can borrow. A business could borrow millions to ease the process of a factory relocation, just as easily as an individual could borrow thousands to ensure they secure their dream property prior to their own sale going through.
Higher interest rates, shorter repayment periods
Because bridging loans are designed to bridge the gap of time before someone sells an asset or receives capital, they are not intended to have a long repayment period. Consequently, bridging loans come with a high APR to cover the lender in the event of the impending finances not materialising.
Bridging loans are paid out quickly
Just as they are expected to be repaid quickly, so too are they paid out quickly. In most circumstances the key reason for someone opting for a bridging loan is speed.
Also known as personal loans
You can generally only apply if you have a good credit score
As long as you have a reasonable credit score you can apply for an unsecured loan. You don’t have to be a homeowner, as no security is required.
Unsecured loans are for smaller amounts
These loans are typically for amounts between £1,000 and £25,000.
Unsecured loans have to be repaid over a shorter period
Repayment terms are usually between one and five years at a fixed rate of interest. The shorter the term, the less overall interest you will generally pay, which is good. However, the monthly payments may be higher, which may be tricky to budget for.
Helps you buy property or land
One of the most common types on loan around, mortgages help you buy land and property. Whether you’re a first time buyer or up-sizing into a bigger home, the chances are you may not have the funds you need to buy a property outright and that’s where mortgages come in.
Long repayment periods
Because buying a property is a large financial commitment, no one is expecting you to pay it back right away. Mortgages can be paid back over long periods – usually spanning decades. The most common lengths of mortgage terms are 25-30 years.
You’ll need to put down a deposit
Most mortgages require you pay a portion of the house price value up front – typically 10-20% (although there are some that take less). This is a demonstration of commitment to the lender of your ability to keep up with the mortgage repayments.
Typically lower interest than other loans
As with most loans, you’ll pay interest on the money you’ve borrowed. With mortgages, the rate of interest is typically close to the base interest rate set by the national bank, but it can vary depending on what type of interest rate your mortgage has. But even though the rate can be low, you can pay large amounts of interest due to the size of the loan and the length of time you pay it back.
Choice of ways to pay interest
There’s typically two ways to pay interest on a mortgage. One is called a ‘fixed rate’ and the other is often known as a ‘tracker’. A fixed-rate mortgage is just as it sounds, the interest rate is fixed for a period of the loan. This can be great if the rate is low and means that if the base interest rate rises in that period, your mortgage interest rate will be unaffected. Tracker rates meanwhile are basically a type of variable rate. A tracker rate will follow (or ‘track’) the movements of the base interest rate and adjust your mortgage interest rate in line with these changes. If the base interest rate is high, this can be useful as it will follow the rate down as well as up, so you could pay less in interest, but it could also mean you pay more if it goes up.
Move your mortgage to another lender
Remortgaging is when you switch your existing mortgage to a new deal, either with your existing lender or a different provider. It doesn’t mean you move house, so the new mortgage is still secured against the same property.
Helps you get a better deal
Remortgaging can get you a better deal on your mortgage in a number of ways, including:
- To reduce the interest rate on your mortgage
- Fixing your monthly payments so you’re protected against future interest rate rises
- Consolidating debts into lower payments
- Raising cash by releasing equity from your home
More equity means even better rates
The more equity you have in your home, the less you borrow against the value of your home (called loan to value or LTV). This lowers the risk to lenders, meaning they can give you an even more competitive rates.
For developing land and property
Development loans are typically used by property developers to fund new projects. Whether the project is the build of a new development, a conversion of an existing one or a renovation, development loans help developers get the finance they need to start and finish their projects.
Buy to let loan
Also known as a buy to let mortgage
Helps to expand your property portfolio
A buy to let mortgage is a loan for buying property for the intention of renting out to tenants, rather than living in yourself.
Traditionally more expensive
Buy-to-let mortgages considered a higher risk by lenders than regular mortgages. As a result, they tend to be more expensive and have higher interest rates, plus you’ll usually need a bigger deposit.
Takes into account rental income
Lenders will carefully consider your rental income and weigh this up against your repayments to make sure you have a big enough buffer.
Fund your business growth
Whether you’re starting your business from scratch or looking to fund a big expansion, businesses often need loans like the rest of us.
Businesses require an adequate amount of capital to fund startup expenses or pay for expansions. As such, companies take out business loans to gain the financial assistance they need.
Options for interest rates and security
With a business loan you can choose whether the rate is fixed or variable. You can also get business loans that are secured against assets (such as stock, vehicles etc.) or unsecured, similar to the way they are for personal finance.