What is a secured loan?
A secured loan is a form of debt that is backed by your property and operates independently of your mortgage.
Since these loans are secured against a home, they are exclusively available to homeowners with sufficient equity, which is why they are also referred to as home equity loans. With this type of loan, your mortgage payments remain unaffected, as both are managed separately.
How do homeowner loans work?
Your secured loan provider will evaluate your property's value and use it as collateral for the loan.
Key points to consider:
- The repayment term generally ranges from 1 to 35 years.
- As with any loan, interest is charged, meaning repaying the loan over a shorter period will reduce the total amount paid.
- Some lenders may impose a penalty for early repayment.
What are the benefits of a secured loan?
Secured loans can be arranged quickly, depending on your circumstances, making them a useful option if you require a fast cash injection.
How much can I borrow with a secured loan
The amount you can borrow with a secured loan will depend on several factors. While each lender has its own eligibility and affordability criteria, they typically assess:
- The Loan to Value (LTV) ratio
- Your income and credit score
- The purpose of the loan
- Your age.
Can I get a secured loan with bad credit?
While obtaining a secured loan with bad credit is possible, it can be more challenging.
Bad credit can result from various factors, such as missed payments, Individual Voluntary Arrangements (IVAs), or bankruptcy.
There are steps you can take to improve your credit rating before applying, though it may take several months to see significant improvements. These steps include:
- Accessing your credit report from major agencies
- Checking for inaccuracies and requesting corrections if needed
- Using credit responsibly and ensuring timely repayments.
How does income affect secured loans?
Your income will be an important factor in the lender’s evaluation of your secured loan application.
A stable income is typically seen as lower risk compared to an income that fluctuates, such as with self-employed individuals or those earning primarily through commission. Self-employed applicants are usually required to provide at least three years of trading history, although some lenders may accept less.
A mortgage broker can recommend the most suitable lenders based on your specific circumstances.
Secured loans for pensioners
Being retired does not prevent you from obtaining a secured loan.
As long as the lender is assured of your ability to make long-term repayments, you are likely to qualify. While some lenders set a maximum age limit of 75 for applicants, others may extend this to over 80.
Secured loans for first time buyers
In most cases, lenders require property ownership for at least six months before approving a secured loan. If you have limited equity in your home, which is common among first-time buyers, you may be considered a higher risk.
Can you get a secured loan for a non-standard property?
Although it is more complex to secure a loan against a non-standard property, it is still possible.
Properties such as those with thatched roofs or listed buildings are considered non-standard and more difficult to sell, which increases the risk for lenders. Since a homeowner loan is secured against the property, non-standard properties are viewed as higher risk, resulting in fewer lenders being available.
Unencumbered properties and secured loans
It can be more difficult to obtain a secured loan on a property that does not already have a mortgage or secured loan in place. This is because secured loans are often taken as a second charge, following an existing first charge mortgage.
What can secured loans be used for?
Secured loans can be used for a variety of purposes.
Many homeowners with existing debt opt for a secured loan to consolidate their debts, often benefiting from lower interest rates compared to unsecured loans. However, if you have bad credit, you may be offered a less favourable rate and a lower Loan to Value (LTV) ratio.
Another common reason for choosing a homeowner loan is to fund home improvement projects. For instance, if you are planning an extension or garage conversion, a secured loan can help finance the development.
Secured loans for buy-to-let properties
You can obtain a secured loan on a buy-to-let property, though the number of available lenders is smaller due to the higher risk associated with such properties.
What happens if you don't pay back a secured loan?
Since the loan is secured against your property, failing to make repayments could result in your home being repossessed.
In such a case, a homeowner loan ranks second in the order of payment. This means the mortgage will be settled first from the proceeds of the sale, followed by the homeowner loan. If the sale does not generate enough funds to cover both the mortgage and the secured loan, you may need to consider entering an IVA or declaring bankruptcy.
What are the alternatives to homeowner loans
When considering a homeowner loan, there are a few alternatives worth exploring.
A common option is to remortgage, which might allow you to secure a better deal and release the funds you need without taking on a new loan. You could also consider a personal loan or a 0% interest credit card, depending on the amount you need, as these options are unsecured and do not put your property at risk.