Secured Loans

From time to time, homeowners will need to increase their mortgage borrowing to raise extra funding. There are a variety of reasons why they may need this extra money, and in normal circumstances a simple remortgage to a new lender or an approach to your existing lender for additional borrowing will suffice. What if you are locked into a long-term fixed deal and you would have to pay a large penalty to come out of that deal? What if your current lender states that affordability fails or a recent change in your employment circumstances will not allow them to offer you any further borrowing? This is where a secured loan can be very useful in allowing you to obtain the extra borrowing that a first charge mortgage may not facilitate. Below we will answer some common questions that arise when people are looking at taking out a secured loan.

What is a secured loan?

A secured loan is basically a second mortgage. You keep your existing mortgage in place and take out further borrowing with a different lender, on a different financial contract and pay that mortgage (secured loan) monthly in the same way as your current mortgage. Taking out a secured loan can be a very good way of raising additional finance, and there are a number of reasons why homeowners may need to do this.

Is the process the same as my existing mortgage?

To a large degree, yes. You will need to be credit searched for the purpose of securing a Decision in Principle and upon acceptance, standard paperwork will need to be supplied as part of the full mortgage application process. This is to assess income, affordability, and eligibility. A valuation of your property, be it physical or online, will be conducted to assess value and to establish whether there is enough equity in your property for a secured loan to be put in place. Basic conveyancing will need to take place, and the lender offering the secured loan will need to register a charge on your property with Land Registry. In essence, this part of the process is much the same as remortgaging to a new lender.

The secured loan will ‘sit behind’ your existing mortgage as a ‘second charge’. Your existing mortgage will take precedence and be classed as the ‘first charge’ on your property and your lender will have to agree to the second charge being registered.

What is the benefit of a secured loan over approaching my existing lender?

There are several benefits of taking out a secured loan rather than simply taking out a further advance with your current mortgage provider. Criteria for secured loans are generally more generous when considering income, affordability and indebtedness. Borrowing amounts for secured loans are generally much smaller than on a first charge mortgage, and there is quite often equity in the property to play with to support the application.

Whilst the process is similar to a first charge mortgage, secured loans generally have more flexible underwriting decisions applied to them. This can help a lot if you have unsecured borrowing to pay off, a change in employment has taken place, or affordability is tight with your current lender.

As with any financial decision, taking the right advice is key. Speak to a Mortgage Expert to see if a secured loan is the right thing for you.

What is benefit of a secured loan over remortgaging to a new lender?

In the first instance, if you need to raise additional funds and this cannot be done with your existing mortgage provider, switching to a new lender would be the best solution. As we have mentioned above, this may not always be possible. Affordability, employment status, or indebtedness can be big obstacles when approaching a new lender for a remortgage.

One other, large factor could be the dreaded ‘early repayment charge’. Mortgage lenders offer fixed, discounted or tracker rate incentives to new customers to win their business. With these incentives however, there are penalties applied. If you decide to tie in to a five-year fixed rate for instance, your lender will apply a penalty for paying the mortgage back within this fixed term. Typically, high street lenders will apply a staggered penalty or early repayment charge that will decrease year on year. It may be 5% of the mortgage balance if repaid in year one, 4% of the mortgage balance if repaid in year two and so on and so forth until the penalty is removed (once the initial incentive has finished and you revert back to the lenders standard variable rate). As you can imagine, if you needed to raise capital and you still have three years of your initial fixed rate left, the penalty to come out of this could run into the thousands.

By leaving your mortgage within its initial fixed rate and taking out a secured loan, you could save a lot of money in not triggering penalties.

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Can I pay off a secured loan once I can remortgage to another lender?

Yes, you can and in most instances it would be deemed good advice to do so. There may be a good reason, as outlined above, why you cannot remortgage or approach your lender about further borrowing.

Let’s look at a typical scenario; You need extra money to finish off a loft conversion in your property. This may cost £30,000 to complete but your current lender has stated that they can’t help you. You don’t want to remortgage to a new lender because it will cost you thousands of pounds in early repayment charges. By taking out a £30,000 secured loan you can obtain the funds needed and take out a normal term on this borrowing, let’s say 25 years. Because you have stretched the term on this secured loan rather than taking out a personal loan (which typically will have a term of 5-7 years), you can keep your monthly payments to a manageable level.

Once your first charge mortgage is coming out of its incentive period and any penalties are about to expire, you can remortgage both the first and second charge amounts into one mortgage. Often this results in a lower overall monthly payment back to one lender and will have saved you thousands of pounds in early repayment charges. With recent changes to how secured loans or second mortgages are now regulated, it is normal for the lender to charge one- or two-months payments to redeem the secured loan rather than having to pay hefty settlement figures.

Speak to a Mortgage Expert about how best to go about utilising a secured loan to suit you.

Is the interest on a secured loan more expensive than a standard mortgage?

Secured loans will generally carry higher interest rates than standard first charge mortgages. As they sit behind your existing lender, they do not take precedent if a property needed to be repossessed. Also, by nature the loan-to-value of a secured loan will always be higher than with your existing mortgage. This, coupled with the fact that underwriting and loan to income is usually more generous, means that the risk taken by secured loan provider’s is higher and therefore the interest rate applied to the borrowing will be higher. Having said that, it will nearly always be a cheaper way of obtaining finance than any personal line of credit would be. The term of repayment on a secured loan can be the same as a standard mortgage, and this helps mitigate the extra interest rate applied.

Is a secured loan the right route for me?

This can only be ascertained once you have the right information to consider. The Expert Brokers that we work with will be able to advise on whether a secured loan is the correct choice for you. Make an enquiry to obtain the right advice that is specific to you and your circumstances.

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As a mortgage is secured against your property, it could be repossessed if you do not keep up mortgage repayments.