A secured loan is where you borrow funds, which are secured against an asset, usually property. This means that, if you default on your payments, the lender can take control of the asset to gain back their money.
Often, a secured loan takes the form of a second charge mortgage, with your current mortgage being the first charge - or the priority lending secured against your property.
Although we hear a lot about second charge mortgages, in actuality you could have as many as five or more, depending on the lender.
Secured loans can be with the same provider as your first mortgage, or might be with an alternative lender. Usually, the same lender offers competitive rates and considers a secured loan an additional advance on your original borrowing.
However, rates on secured loans can be higher than on initial mortgages given the increased risk level, whereby the first mortgage has priority if the house were to be repossessed and sold.
Therefore, a secured loan or second charge mortgage could be left unpaid even if the property were repossessed, if all of the sale proceeds were taken by the first mortgage provider to repay the outstanding balance.
Why Would I Choose a Secured Loan Instead of a Mortgage?
Sometimes, a secured loan is a good option, even if the rates are higher than those available through a remortgage.
Here are some of the most common scenarios when a secured loan makes the most sense:
- Your current mortgage rate is excellent. If you have a mortgage with a highly competitive rate, you might be well advised never to sacrifice that mortgage if no product on the current market can beat it. Usually, these are old mortgages sold many years ago - tracker mortgages with a small margin on the UK interest rates can be as low as 0.99% interest. In this scenario, if you wanted to release equity, it would be preferable to take out a secured loan as a second charge, without remortgaging your current mortgage at a much higher interest rate.
- Fast processing. When you need to release capital fast, a secured loan is often the quickest option available. If the loan is at a low LTV and you don't need a property valuation, you can even achieve a secured loan in one day. Typically, the process takes around a week, with an extra few days if you need a valuation report. However, secured loans are nearly always faster than remortgages, so are a good option when you need funds quickly.
- Applicants with variable income. As more people start their own businesses or become self-employed, a remortgage can be difficult to negotiate if you can't demonstrate your income, or don’t have two to three years of trading history. Secured loans tend to be more flexible, and you can use bank statements to demonstrate your income if you don't have filed accounts. For applicants who have recently changed jobs, or don't have filed accounts, this is a better option than waiting two to three years until you are eligible to apply for a remortgage.
- Interest-Only Remortgages. Many lenders will offer a range of remortgages, but it can be harder to find an interest-only option. Secured lending is available as an interest-only loan, provided you meet other criteria.
- Higher LTV Remortgages. If you are looking to finance up to 95% of your property, you will struggle to find a remortgage product that offers this high an LTV. Most lenders will cap a remortgage up to 90% as an absolute maximum. However, secured loans can cope with a 95% LTV provided you meet other lending policies.
- Bad Credit History. With severe bad credit history - including CCJs or bankruptcies - it can be challenging to find a remortgage. Specialist lenders can be more flexible, but with secured loans, there is a higher degree of negotiation, and you usually have more options than you would through a remortgage.
Secured Loans vs Remortgages in Summary
Remortgaging is usually the cheapest way of accessing further lending, and is often the first choice for homeowners who want to release equity.
Secured loans are an alternative option, and although more expensive, can be a viable choice when needing to release funds fast, retain your current mortgage rate, or to find borrowing when you cannot meet the usual remortgage criteria.
If you are considering a secured loan, or need help comparing options for remortgaging and a second charge mortgage, give the Revolution Brokers team a call on 0330 304 3040 or send us a message to info@revolutionbrokers.co.uk.
