The market for secured loans is growing, as more homeowners opt for improving, rather than moving. There are, however, lots of other reasons why homeowners are using secured loans.
It’s not always possible for homeowners to borrow the level of money that they sometimes need unsecured and main or 1st mortgage lenders can and do say no to additional borrowing for a variety of reasons. In this article, we look at secured loans and how they can provide a useful source of funds.
What are Secured Loans
Secured loans, also known as homeowner loans, allow homeowners to borrow larger sums of money, often at better interest rates, than they could by unsecured means.
The actual amount that can be borrowed, interest rate charged etc, depends upon the amount of equity in the security property, the applicants’ credit history and personal status.
Also known as homeowner loans, second mortgages, second charge or even third charge loans etc, they are in fact a type of mortgage, secured against property. The main point that needs to be made is that a secured loan is a mortgage and to apply, the applicant must have an existing main or other mortgage secured against their property. Without going into unnecessary detail, secured means that their home is charged with the debt, by legal means.
Just like a first main mortgage, they are regulated by the FCA (Financial Conduct Authority), so borrowers are afforded the same level of consumer protection.
Why should a homeowner choose a secured loan?
There are several reasons why it might be a better option for a homeowner to take out a secured loan, but ultimately it depends on individual circumstances.
So, as a first example, a homeowner with a £240,000 first or main mortgage, taken out 3 years ago, on a 5 years fixed rate deal, 1.75%, is tied to a lender with a 6% Early Repayment Charge (ERC). The homeowner owns a new business, with an 18 month trading history, that needs to purchase £50,000 of stock quite quickly in order to take advantage of seasonal growth in the market. The homeowner asks his business Bank and is rejected for an unsecured loan.
He then approaches his main mortgage lender, for a further advance, as there is lots of equity in his property. They turn him down for two reasons:
- business purposes lending, is outside of criteria
- the lender requires a 2 year trading history as a minimum
There are some residential mortgage lenders that will accept a year’s accounts, but they are few and far between, but lending for business purposes is almost always out of the question.
A re-mortgage, plus capital raising is considered, but discounted due to a combination of one year’s trading accounts, the raising of money for business purpose, plus a quite large 6% ERC.
In this case, the homeowner could potentially use a secured loan to good effect. Most second charge secured lenders will lend for any legal purpose and a year’s trading history is quite acceptable to most.
He could borrow the £50,000 needed for the business and in two years re-mortgage and consolidate both the £240,000 main mortgage and secured loan into one first charge mortgage loan, subject to affordability, status and valuation. The lending for business purpose problem, does not exist anymore of course.
Changes in credit status can be another good reason to look at a secured loan for additional borrowing.
Lending is “Subject to Status” and for the most part, this means credit history. Even a small change in credit history, such as a missed or late credit card payment, can affect the ability to borrow. Secured borrowing, as it’s backed by assets, is often available where credit is poor, where larger loan unsecured borrowing is unavailable.
If a homeowner, with a main mortgage that was taken out at a time when their credit history was good, needs further borrowing at a time when there has been a deterioration, they may have a problem. Their existing lender would likely say no to a further advance and to re-mortgage a large loan, which was issued on “prime” low cost terms, to a subprime, far more expensive loan, could be a financial poor decision.
Taking out a secured loan which leaves the larger low -cost main mortgage untouched, can be a financially beneficial, as only the top up portion will be charged at a higher interest rate.