Secured Loan

secured loan

There are many reasons that you may want to borrow additional funds such as for home improvements, purchasing a car, going on holiday or even to consolidate debts. Public spending has increased over the past few years and the need for secured loans has grown as a result.

What is a secured loan?

There are many terms used to describe secured loans such as a personal secured loan, further advance, second charge loan, additional borrowing and equity release.

A secured loan is effectively a regular loan but with an asset placed as collateral. In the event that the borrower defaults, the lender takes possession of the asset and may sell it to regain the amount originally lent. In essence, every mortgage can be considered a secured loan as a property is offered as security.

Secured loans are generally cheaper than an unsecured as they are less risky for the lender due to the security offered. This does not mean they are less risky for you. In fact, they are actually a greater risk than an unsecured loan as you are offering your property as collateral so it puts your property at risk.

Whilst there is a greater risk to you, this may be the best way to borrow as:

  • most lenders will not lend over £25,000 as an unsecured loan
  • the interest rate can be much lower on a secured loan than that of an unsecured loan

Providing there is sufficient equity remaining in your property, you can borrow a far greater sum with a secured loan. You will be able to borrow up to the lender's permitted loan to value which is dependant on the mortgage lender and the type of product you have.

e.g. a property valued at £500,000 with an outstanding mortgage of £200,000 that allows up to 75% LTV will mean you can release an additional £175,000 (£500,000 x 75% - £200,000)

You do not need to take a secured loan from the same lender as your current mortgage, however, it is recommended that you speak with them first as another lender may require another valuation on the property which is an expense you may be able to avoid if you stick with the same lender. Secondly, your current lender may offer a lower interest rate as they already hold the property as security (from the current mortgage).

Your current mortgage lender will already have their loan borrowed against the property noted (known as a '1st charge'). If you take a secured loan with the same lender, they will add this additional amount onto their existing 1st charge. However, if you take a secured loan from another lender, they will note their loan as a 2nd charge. This means that if you default and the property is sold, the 1st charge holder will recover their money first, then the 2nd charge holder will recover their money from whatever remains. As the 2nd charge holder must wait for the 1st charge holder to be repaid, it is a greater risk for them and so they will typically offer a higher interest rate for the loan.

The interest rates of secured loans vary from lender to lender; however, they will usually fall into one of the following categories:

Advice when taking a secured loan

  • Borrowing additional funds will mean that your mortgage payments will increase. You must ensure you can afford the mortgage repayments, particularly if on a variable rate. You should budget just in case interest rates increase by a couple of percent
  • It is strongly recommended that you discuss a secured loan with your current lender first as you may avoid paying charges such as a valuation fee. They may also offer a lower interest rate as they already have a charge over the property
  • In the event of borrowing additional funds at the same rate as your current mortgage product, an ERC may apply to the additional borrowing as well if it already exists on your current mortgage. Secondly, note that the product expiry date will remain the same e.g. if you have a 2-year fixed rate; the fixed rate expiry date will be from the original mortgage date not from the secured loan date

Summary

  • A secured loan is a loan where the borrower pledges some form of collateral (typically property) against the loan
  • You do not need to take a secured loan from the same lender as your current mortgage
  • Secured loans typically fall into three product types: fixed, variable and at the same rate as your current mortgage product

For more information about 'Secured Loans', you can call us on 020 8783 1337 or submit an online quote.

 
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