What is a secured loan?
A secured loan lets you take out a loan by using an asset such as a property as collateral. If you can’t keep up with your repayments, the assets secured against the loan may be repossessed by the lender.
Lenders will take into account your credit score when they set the rate for a secured loan, but they tend to be more sympathetic to borrowers with poor credit scores as the loan is secured against your property.
You should also bear in mind that the rates on borrowing against your loan are usually variable - they can move up and down according to the economic climate or the lender's own criteria.
What is a secured mortgage?
A mortgage is a loan you take out to fund the purchase of a property and is usually paid over several years (often 25) which can be paid off in more manageable instalments. The house bought is used as collateral to secure the loan so that the lender can take back the property in case you can’t meet the repayment of the loan.
A second mortgage is a next mortgage you take out, after your primary mortgage. The second mortgage also takes second place in the priority of payment but is otherwise no different from your regular mortgage, so you’ll essentially have two mortgages/loans taken out on the same property.
A second mortgage is only an option if you have equity in your home which is the percentage of the property you own outright.
When is a secured loan better than a second mortgage?
Secured loans tend to be less popular due to the risk of losing your property or the asset you’re putting up to secure the loan. However, there are a few advantages to opting for a secured loan against your property over a second mortgage:
- The interest rates on secured loans are usually lower
- It may be easier to apply for a secured loan if you can’t provide evidence of a steady income such as if you’re self-employed
- There’s still a risk of losing the property you’re paying your second mortgage on if you can’t make the repayments
- If you need the money quickly, you can get hold of the funds within 7 working days
What fees are associated with secured loans?
With a second secured mortgage you would usually pay a higher interest rate than your main mortgage. You’d also likely pay a number of extra fees such as:
- A booking fee which is paid up front during the application process, costing around £100
- An arrangement fee for the mortgage set-up, often around £1,000
- A valuation fee for the lender’s survey of the property, the amount of which depends on the property in question
- Legal fees to pay for the solicitor’s input in the paperwork
- A higher lending charge to cover a high percentage of the purchase price
- An advice fee may be charged to pay for the financial advisor
- A CHAPS fee to cover the cost of sending mortgage funds to your solicitor
- An own building insurance fee if you have taken out the building insurance from a third party – usually around £50
Secured loans keep extra charges and fees to a minimum but you may be liable to pay a number of fees depending on the lender:
- Origination charges cover the application process – usually around 0.5% to 1% of the loan balance
- Clerical and administrative fees
- Titling fees are paid as closing costs you pay when borrowing against your loan
- Valuation fees
- Fees for registering consent of a second charge
- Broker fees which can charge up to 10% of the loan
Who is eligible?
In order to be eligible for a second secured mortgage, you’ll have to already be a homeowner with a primary mortgage.
You will also need to prove your income and ability to repay the second mortgage monthly repayments, but the amount a lender will give you will be based on and secured against the equity in your home.
For secured loans, the following will be taken into consideration:
- Your income
- Your credit score
- Any existing credit commitments you already have including a mortgage
- The amount of equity that is available in your property
The interest rate you’ll have to pay will depend on both your credit score and the property you’re taking the loan out against.
How much can I borrow?
With a secured loan against property, you can borrow any amount from £10,000 to £500,000, but this is dependent on the value of your property.
With a mortgage, it’ll depend on the amount you want to borrow in relation to the property's value, your credit score, income and outgoings. Generally speaking, a lender will often offer four times your annual income so if you earn £50,000 a year, you may be offered a £200,000 loan.
Should I choose a secured loan or a second mortgage?
When it comes to a loan vs a mortgage, It depends on your individual financial situation and preferences.
If you are in need of immediate funds to pay off your primary mortgage and don’t mind taking the risk, a secured loan may be appropriate – provided you can guarantee you’ll be able to make the repayments for this.
On the other hand, a second mortgage can help if you’re struggling with another unsecured borrowing or are looking for a way to raise money for home improvements with the lowered risks. It’s best to check by the specific deal that’s on offer to make an informed decision.
Taking out large loans can be difficult to navigate, so we make comparing easy with the MoneySuperMarket comparison tool. Whether you want to opt for a secured loan against your home or a second mortgage, we’ll give you a tailored list of options for you to choose from. You can also find personal loans that may be more suitable for your specific needs, so it’s a good idea to keep your options open.
Simply tell us a little about your financial situation and what kind of loan you’re looking for, including what you’ll be spending the funds on and we’ll give you a list of competitive offers to date. You’ll be able to view the perks and rates, so you can compare just as easily. Once you’ve decided, you can click through to the provider after selecting your deal and get the process started.
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