We’ve seen a big increase in the amount of secured loans business we have seen since the start of 2007 and hope that this level of business will contintue and improve over the next few years and more and more secured lenders come to the market and continue to offer competitive loan rates for customers – Jonathan Holland, Master Secured Loan Broker at Lending Expert | Secured & Homeowner Loans
A Guide to Secured Loans
A secured loan is money you borrow, which is secured against an asset that you own. The asset is usually a person’s home. Hence, it’s commonly referred to as a homeowner’s loan. Look at it this way: secured loans are loans that are available to property owners (or mortgage holders). In case you’re unable to pay, the lenders can sell your house to get their money back. Due to this, you’ll get cheaper interest rates compared to unsecured loans. But it’s a riskier option. You can literally lose your home. So before you go get yourself one of the homeowners loans, you need to understand how they work.
Understanding Secured Loans
Secured loans are borrowed when a person needs large sums of money. They typically range between £5,000 and £500,000. However, with some lenders you can always borrow less, from £3,000. It depends on your situation and story, and how well you present it to the lender. The loans are for those who want to borrow larger amounts of money, more than what the standard personal loans can offer. You can borrow money for anything from weddings, home improvements to even buying a new car. The lump sum of money is secured against your property. The lender secures it by way of a “second charge”. (Your main mortgage is held on the “first charge” basis). All this is legal and is registered with the Lands Ministry.
The loans are available to people who own their own homes or who currently hold a mortgage.
Secured loans come under different names including:
- Debt consolidation loans (though not all debt consolidation loans are secured);
- Home equity or homeowner loans or;
- Second mortgages/ second charge mortgages.
When you fail to keep up with your monthly repayments, the lenders will repossess you house and sell it. The first charge lender will be the first to get paid. The second charge will get the remainder, up to the value of the outstanding debt. The debt consolidation loans that are secured on your home can be either be first or second charge. If it’s a first charge mortgage, it means you’ve taken out a loan when you have no existing mortgage. Whereas the second charge mortgage means you have to set up a new agreement, with your existing mortgage lender or you can alternatively go to a different lender.
Selling and administration of the first charge loans is currently regulated by the Financial Conduct Authority (FCA). The second charge loans are also regulated by the FCA, but under different rules. This is set to change in March 2016, when all secured loans and mortgages will be treated the same.
Why would you want a secured loan?
First, it’s easier to obtain. Since the lenders are provided with security, they are willing to take the risk and lend you some money. This is including those who have poor credit scores. In addition, you can borrow huge sums of money. Most people go up to £250,000. The amount depends on your personal needs. Furthermore, you’ll pay a lower interest rate than with a personal loan, simply because the loan is secured against your home.
One of the factors that make homeowner loans popular is that they can be borrowed over a long period. This helps in off-setting hefty set-up costs. The loans usually last between 5 and 20 years. And you know what that also means? Your monthly payments reduce. But be careful on that last bit. The amount that you’ll pay each month will vary if your interest rate is not fixed. This means that your monthly repayments could increase or decrease. Hence, you should ensure that you know if you’ll be charges using a fixed or variable rate.
Before you borrow, first know your financial position. Get a handle on your existing debts. This will enable you know how much you should borrow. In addition, make a budget working out the maximum realistic amount that you can commit to repaying. If you underestimate, it’ll take longer to repay, and cost you more in interest. If you overestimate, you’ll overstretch and strain yourself, and risk your home. And don’t borrow more than you need. Ignore those “Borrow a little more to buy your loved one a gift” tips.
These are secured loans, not government grants. Don’t put your home on the line for a gift.
Further reading on secured borrowing: Secured loans: what are they?