Secured loans have become more popular in the UK in recent years, and can be a great option for homeowners looking to raise some cash. But how are they different from a traditional mortgage? And how do you go about getting one?
What is a secured loan?
Unhelpfully, secured loans are also known by a host of other names, such as homeowner loans, second mortgages and second charge mortgages. But whatever, they’re called, they’re all the same thing.
And the clue to understanding them is in the name: a secured loan is where the money you borrow is secured against something. The idea is that if you then fail to make your repayments, the lender can take ownership of what the loan is secured against and sell it, so that they get their money back.
Of course, that’s a worst-case scenario, but because lenders are certain they will get repaid — unlike with unsecured loans — they are usually happier to offer you more money or better rates.
How do secured loans work?
There’s a good reason that they are sometimes known as second mortgages, secured loans work rather like mortgages.
As with a normal mortgage, you take out the loan over a specified term. That might just be a few years if you’re only borrowing a small amount, or it could run for decades. You then make monthly repayments towards paying off that loan, and once you reach the end of the term it’s all paid off. Lovely!
There is one key difference with a traditional mortgage though, and that’s how the lender works out what you can borrow. With a normal mortgage, the lender will calculate what your home is worth and then lend you up to a maximum percentage of that value. It’s helpfully called loan to value, or LTV for short.
Of course you will also have to consider LTV with a secured loan, this will determine how much you are able to borrow and is based on the amount of equity you have in your property.
We know what you’re thinking ‒ what on earth is equity?
Well, basically, it’s the portion of the home you own mortgage-free. That means it’s the difference between the overall value of your home and the mortgage you still owe. So if your house is worth £250,000 and you have £150,000 left on the mortgage, then you have £100,000 in equity.
The great thing about equity is that it lets you take into account housing market fluctuations too. Say you bought a house for £200,000 and have £100,000 left to pay, but your house is now worth £300,000. That means you now have £200,000 of equity in your property.
Secured vs unsecured loans
Just as you can get a loan where the money you borrow is secured against some sort of asset, like a house or a car, you can also get unsecured loans.
As the name suggests, this is where the loan isn’t secured against something that the lender can take possession of should you fail to make your repayments.
Obviously, this offers the lender less security as they are effectively taking on more risk. As a result these unsecured loans tend to have smaller loan limits and higher interest rates than unsecured loans.
Why take out a secured loan?
The big appeal of a secured loan is you can borrow against your property without touching your original mortgage. It might be that you’ve managed to bag a cracking interest rate, and remortgaging would mean moving to a higher rate. Alternatively, you might be in the middle of a fixed or tracker period, and remortgaging would mean having to fork out a small fortune on exit fees.
A secured loan means you can borrow against your house, without having to change that first mortgage.
As for why you might want that cash, there’s all sorts of things that a secured loan can help with. It could be that you’ve finally decided to take the plunge and go with that refurbishment work, such as a loft conversion or an extension. You can borrow larger amounts with a secured loan than with an unsecured loan, so going down this route might be a more realistic option if you need more money to play with.
Secured loans can also be a really useful option for debt consolidation. It may be that you’ve got a handful of loans already outstanding, and that means different loan balances, repayment dates and interest rates to keep on top of. You can use a secured loan to consolidate those various loans into a single loan, making it much more straightforward to keep on top of precisely how much you owe.
How much can I borrow with a secured loan?
There’s no simple answer to this. Ultimately it comes down to three main things:
Knowing how much equity you have in your property is a crucial step in understanding how much you could potentially borrow with a secured loan. That and the LTV, on offer from lenders, will pretty much determine the maximum amount you could borrow.
This can mean that people in less valuable homes, but with little or no mortgage outstanding, are able to borrow more than other borrowers in far more expensive properties but who still owe large sums on their mortgage.
Lenders aren’t all the same. They each have different criteria over what sort of borrowers they are happy to lend to, what sort of properties they will lend against, and the maximum they will lend.
As a result two different lenders may be happy to offer you a secured loan, but the actual loan amounts can vary substantially.
This is why it’s helpful to use a broker: they’ll be able to help you sort through different offers and find lenders that tick all of your boxes.
Whatever type of borrowing you want to go for, whether it’s a secured loan or a credit card, the lender will want to do their homework on you before handing over the cash. After all, they want to make sure you can afford to repay back the loan, even in worst case scenarios.
If you have a great credit record and sufficient income, after all your outgoings, then lenders will generally be happier lending you larger amounts than if you have a history of missed or late payments.
What will a secured loan cost?
The big cost to consider here is the interest rate. Obviously, the higher the interest rate, the larger your secured loan repayments will be, and therefore the more it will cost you overall.
The interest rate on a secured loan can be either variable or fixed. This is pretty self explanatory; if the rate is variable it can go up or down over time, meaning your monthly repayments can change too. If the rate is fixed then it is set in stone for a specific period, meaning you know precisely what your payments will look like. It’s worth noting that at the end of a fixed rate period the loan will turn into a variable rate one, this could mean you end up having higher monthly payments.
The interest rate is not your only consideration though. It’s also worth noting that secured loans can come with some fees, but this is dependent on your lender. Rest assured that everything will be explained before you sign on the dotted line!
How long does a secured loan last?
This comes down to you and how long you need it to last really. Generally secured loans are available from terms as short as 5 years, to as long as 35 years, but you can always accelerate payments and/or clear this at any time during the loan term.
The shorter the term you go for, the less the loan will cost you overall as you’ll pay less interest. However, for the sake of your budgets, you may need to go for a longer loan to reduce the size of your monthly repayments to more manageable levels, even if it means paying a little more in the long run.
Can I get a secured loan with bad credit?
There will be some lenders who will consider you for a secured loan, even if you’re got a more patchy repayment record.
It won’t be all lenders though, so you’ll have a more limited choice than a borrower with a spotless history. You may also have to pay a higher interest rate to boot.
So, there you have it, the most common questions we get asked about secured loans, answered. If you’re thinking about using your house to borrow the money you need and are wondering how much you could borrow, try our secured loan calculator.
It only takes 30 seconds and can show you how much you could borrow and how much your repayments might be.
If you borrow £35,500 over 14 years at a rate of 8.95% variable, you will pay 168 instalments of £418.88 per month and a total amount payable of £70,371.84. This includes the net loan, interest of £30,326.84, a broker fee of £3,550 and a lender fee of £995. The overall cost for comparison is 11.8% APRC variable.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT”;“THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.”