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What is a secured loan?
A secured loan is a loan that is secured against your property using it as security for the loan, meaning that if it’s not paid, the lender can ultimately repossess the property to retrieve the loan amount outstanding, interest and legal costs.
This is unlike a normal personal loan that is often unsecured meaning there is no asset being used as collateral.
Secured loans come in different formats, for example, your mortgage is a secured loan and should be the first charge on your property. The most common form of secured loan when being discussed is a second charge mortgage, so a second mortgage with another lender that sits on top of the current one.
Like the first charge mortgage, if this is not paid, the lender has the power to go to court and begin the repossession process if ruled in their favour.
Like taking a standard mortgage, taking professional advice is always very important.
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How long does a secured loan take?
The amount of time a secured loan can take will vary between lender to lender and also the case. Everybody’s situation is different so this will affect timescales.
A common amount of time for a more straightforward secured loan to get agreed from the date you apply / application is around 4-6 weeks.
There are various things that can slow down the process. For example, how quickly you deal with your broker, give answers and all your required documents will be a factor.
From there, how quick the lender is to review your case and ask for more information will affect things.
The lender may also need to send someone out to inspect and value your property so this can hold things up. Sometimes they may be able to use an online valuation / desktop valuation of some sort which often makes things quicker.
If a solicitor is needed, that is another party that can take time so something to factor in and as your current lender will usually need to consent to the second charge taking place, a slight delay could happen there.
That is why giving timescales can be very difficult but for a simple case, 2 to 4 weeks is a good guide.
How does a secured loan work?
When you apply for a secured loan, you usually apply for a lump sum of money for a specific use which will need to be repaid over a certain amount of time, for example, 15 years on a repayment basis. On a loan such as this, both capital and interest would be paid.
Some lenders do offer secured loans on an interest only basis, but this would depend on the criteria of the lender and may affect the rate of the product too. An adviser would be able to help with this.
The lender would ask what you are using the money for, for example it may be for home improvements, a new car, a deposit for a buy to let property, debt consolidation etc. Different lenders have different rules on what they will lend for so depending on what you intend to do with the money, this could affect the lender that you go with.
You make payments on the secured loan like any other mortgage and if you fail to do so, this could get you into trouble. The lender would begin to report missed payments with the credit reference agencies and send you letters to make you aware of the situation. If it continued, they would then need to begin legal proceedings. After a long enough period, the lender may win the right to take possession of the home so it’s essential that a second charge mortgage is paid like any other.
Can I sell my house with a secured loan on it?
Yes, if you are a homeowner, you are free to sell your house if you have secured loans on it but be aware of any early repayment charges that may be on there for selling early. Ask your adviser to clarify this if you are considering one.
Should I take advice before taking a secured loan?
Absolutely. Like any mortgage, a secured loan is a big commitment and as it is secured to your home, thought needs to go into the decision before going ahead so take professional advice.
We would recommend speaking to someone that can look at both secured loans and standard remortgages so they can explore the route of a second charge mortgage and a full first charge remortgage with money being raised. They would factor in rates across both mortgages, penalties, criteria and fees.
When taking a residential secured loan, use a broker that is regulated by the Financial Conduct Authority. If they are, they should show on the FCA register.
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Why would I take a secured loan rather than just remortgage?
This is an important question, and it is asked a lot. There are many reasons that someone may take a second charge mortgage rather than just remortgage their original one. Some reasons for this are as follows:
- If you have rate on the original mortgage that you would not get again so you want to keep the existing balance on the competitive rate with the top up on a secured loan.
- If there is a large penalty for redeeming the current mortgage, for example if you owed £300,000 with a 5% penalty, that would mean paying a £15,000 penalty to move lender before any other fees. In this scenario, a secured loan may make more sense. Your adviser would be able to work this out for you.
- If you do not fit criteria for a standard remortgage. Based on what you intend to do with the money or your credit file, it may be that you would not have the option to remortgage to a new lender at this time. A common strategy can be to take a second charge mortgage to obtain the funds needed and then look to remortgage everything in the future back to a standard first charge mortgage. Penalties would need to be considered here so discuss your plan with an adviser.
You should seek professional advice when looking at a secured loan to weigh up whether it’s best to take one vs changing your first charge mortgage.
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Are secured loans hard to get?
It depends on the circumstances. You will need to be a homeowner, and every lender has different rules and for residential secured loans, the lender has to run finance affordability checks like any other mortgage.
What credit score is needed for a secured loan?
There is no fixed amount that is needed, and it would depend on the lender. Some lenders specialise in secured loans for people with debt or adverse credit but just bear in mind that this may mean a higher interest rate.
What do people use the money for when taking a secured loan?
People may use the money from a secured loan for a variety of different things. These may be as follows:
- Improvements to their home.
- Money towards another property, for example a holiday property or buy to let.
- Money for personal use, e.g., a family gift or new car.
- To consolidate debts, e.g., pay off unsecured loans and credit cards using the money. Think very carefully about doing this as the debt will now become secured to your home so your home could be repossessed if they are not paid. Always take advice before doing this.
Can I get a secured loan on a buy to let property?
Yes, some lenders will offer a secured loan on a buy to let property. The rules work a bit differently here as the amount you can borrow will be linked to the rental value of the property with some lenders making an allowance if they feel you have a high personal income that they can consider too (they call this top slicing).
Buy to let secured loans are unregulated and often carry higher rates too so speak with an adviser that can confirm the individual rates and give advice tailed to your situation.
Secured loans can be an ideal solution when taking money out of your property as you are a homeowner, but this is not the case every time. Sometimes a standard remortgage may be the cheaper route, but you need to consider all costs.
Sometimes, not taking secured borrowing may be best if you are thinking about securing debts to your home.
Always take professional advice before arranging a secured loan or any other type of mortgage.
If you would like advice, please fill in the contact box to speak with a professional adviser who can tell you your options.