Couple planning a new home build

The difference between a secured loan and a second mortgage

It's not always easy to get credit these days. Many banks and building societies have tightened up their lending policies.

But if you are a homeowner, one option if you need to borrow could be a so-called secured loan.  Such loans are secured against the value of your property, so you have to own a home outright or hold a mortgage on the property. In fact, secured loans are sometimes called homeowner loans or second mortgages. 

Bigger borrowing

There are several advantages to secured loans. First, you can borrow a bigger amount with a secured loan than with a personal loan that is unsecured. For example, many banks and building societies will lend up to £100,000 on a secured loan. With a personal unsecured loan, the maximum advance you are likely to get is £25,000.

You can also take longer to pay back the debt - a term of 15 or 20 years is not unusual with a secured loan, as opposed to five or perhaps 10 with the unsecured option.  A longer term usually means lower monthly repayments, but remember that you will pay more in total interest if it takes a long time to clear the debt.

Secured loans also lack flexibility as there is almost always a penalty to pay if you clear the debt early.

Rates on secured loans

The interest rates on secured loans are sometimes lower than the rates on unsecured borrowing, but they vary from lender to lender so it's always a good idea to compare rates using an independent comparison website such as MoneySuperMarket. Don't forget to check out any fees, too.

The rate will also depend on the size of the loan, the length of the term and the amount of equity in your home. The equity is the difference between the property's current value and any outstanding mortgage. If, for example, your house is worth £300,000 but your mortgage is £200,000, you have equity of £100,000.

Credit score

Lenders will take into account your credit score when they set the rate for a secured loan. However, they tend to be more sympathetic to borrowers with poor credit scores because the loan is secured against your property. In other words, the bank or building society will always get its money back.

Your home is at risk

Secured loans are often used to finance home improvements or to consolidate other debts and can be a credit lifeline. But there are some potential pitfalls. The biggest risk of a secured loan is the risk to your home. If you default on your payments, the lender can repossess your home in order to clear the debt. You should therefore think very carefully before you take out a secured loan as you could lose the roof over your head. 

You should also bear in mind that the rates on secured loans are usually variable - in other words they can move up and down according to the economic climate or the lender's own criteria. You should always check whether the rates are fixed or variable, and make sure you factor any rate rises into your budget calculations.

Secured loans also lack flexibility as there is almost always a penalty to pay if you clear the debt early.

Increase your mortgage

An alternative to a secured loan is to increase the existing mortgage on your property, sometimes known as a further advance. Again, a further advance is only an option if you have equity in your home. You would usually pay a different rate on a further advance than your main mortgage, plus any set up fees, but it can still be cost effective.

Or, you could switch to another lender and take out a bigger mortgage. Let's say your home is worth £300,000 and your mortgage is £200,000, you could switch to a different bank or building society and take out a mortgage of, say, £230,000 in order to finance an extension.

Of course, you would have to satisfy the new lender's criteria and there might be legal and other costs, but if you can switch onto a lower mortgage rate, you might even end up better off.

Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.

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