Secured Interest-Only Home Loans

Secured home loans are a viable alternative to a conventional mortgage and beneficial in multiple scenarios. Here we look at whether a secured loan can be structured with interest-only payments and what sort of providers you'd need to apply to.

Secured Interest-Only Home Loans

Revolution Brokers often receive enquiries about interest-only secured home loans - as a second charge mortgage, as an alternative form of lending, or as a more flexible borrowing method.

Here we'll explain how interest-only secured home loans work, what the criteria are, and how they differ from a standard mortgage.

If you'd like help comparing interest-only borrowing rates, or finding a lender who will offer you competitive terms, contact the Revolution team on 0330 304 3040 or email us at info@revolutionbrokers.co.uk.

What is the Difference Between a Secured and an Unsecured Home Loan?

Secured loans mean:

  • The lending is secured against an asset - such as a property.
  • If the loan is not repaid, the lender repossesses the asset lender to recoup the debt.
  • On an interest-only secured loan, the typical security is your home.
  • Secured home loans are a way for homeowners who already have a mortgage to take out additional borrowing.
  • If you have a mortgage and a secured loan, this is sometimes called a 'second charge' mortgage, as it is also secured against your home, with the first-charge mortgage having priority in a repossession scenario.

Unsecured loans, on the other hand:

  • Are not secured against an asset, so the lender has no security.
  • Typical unsecured loans are credit cards, overdrafts or personal loans.
  • The criteria are often stricter, and the interest rates higher to reflect the increased risk level.

What are the Advantages of an Interest-Only Secured Home Loan?

  1. Lower Costs. On an interest-only loan, you only pay the interest, without repaying any of the capital. That means that your monthly costs will be lower.
  2. Better Interest Rates. As the lending is secured against your property, the interest rates offered will be lower than for unsecured borrowing.
  3. Flexible Terms. Most unsecured loans can be up to seven years, but a home loan can run up to 15 years, or even up to 25 years depending on the circumstances and the lender.
  4. Credit History Growth. Given the low-risk level accepted by the lender, the terms are usually much more flexible. If you're looking for an extended payment term, you can gradually improve your credit rating by ensuring you keep up to date with the interest payments.

Are There Disadvantages to a Secured Home Loan?

The big downside is that you are only paying the interest each month, so you need to have an exit strategy to demonstrate to your lender that you will be able to repay the full capital sum borrowed at the end of the term.

We'll explore the most suitable repayment vehicles later, but if you reach the end of the loan period and your exit strategy falls through, you may need to move quickly to find a way to repay or refinance the debt.

In Which Situations is an Interest-Only Home Loan the Best Option?

Most of the time, a secured loan is used for property extensions or conversions. This borrowing releases equity held and is repaid on an interest-only basis.

Another popular reason is to consolidate debts. A secured loan is likely to carry lower interest rates and give you a much more extended period to control your budget and pay back the borrowing.

Other reasons include raising funds for personal reasons or to finance an investment.

Secured Interest-Only Home Loan Affordability Considerations

Lenders will need to assess your income, to be confident that you can afford the monthly payments.

The below shows an example of how the payments would look on a personal loan, as compared to an interest-only secured loan:

 

Personal Loan Term

Monthly cost

Total Payable

Three years

£448.32

£16,157.32

Five years

£282.31

£16,938.36

Seven years

£211.23

£17,743.05

 

Interest-Only Secured Loan

Monthly cost

Total Payable

Ten years

£36.99

£19,439.29

15-years

£36.99

£21,658.93

25-years

£36.99

£26,098.21

This illustrates how an interest-only secured loan can significantly reduce your monthly outgoings.

However, the total repayable is much higher, since the monthly payments do not include any element of the original amount borrowed.

Is There a Maximum I Can Borrow on a Secured Home Loan?

The value you can borrow depends on how much equity you own in your property, and what Loan to Value ratio the lender offers.

Many lenders set a minimum equity threshold - this can be anywhere from £100,000 upwards, and some providers do not require a minimum at all.

For example, if you own a property worth £200,000 and have an existing mortgage of £100,000, you have £100,000 of equity - this might dictate which lenders are best to apply to.

The Loan to Value ratio also comes into play - this indicates the maximum a lender will offer, against the value of your property.

Say a lender has a 60% maximum LTV for secured interest-only loans. If you have a property worth £200,000 and owe £70,000 on a mortgage, they can offer a secured loan up to £50,000.

In some cases, you can achieve a higher Loan to Value. It varies across the market, with Loan to Value caps ranging from 50% up to 85%.

Is a Second Charge Mortgage Better than a Remortgage?

The right lending depends on what you need the capital for and your circumstances.

In some cases, a remortgage isn't possible or isn't attractive. For example:

  • Your existing mortgage offers excellent interest rates that are not available on a remortgage.
  • You are tied into a fixed period and would have to pay early repayment fees to remortgage.
  • Your lender cannot offer a remortgage due to issues with your credit, or if your financial circumstances have changed.
  • You want to blend lending types, by avoiding two simultaneous repayment loans, or by retaining your existing mortgage and using interest-only lending to raise the additional funds needed.

For independent advice about the most suitable lending options for your requirements, give us a call on 0330 304 3040.

How Do the Affordability Criteria Work on Secured Home Loans?

Each lender will have its own policy, but the general affordability criteria look at your credit file, and your income to ensure you can afford the debt.

This assessment considers a wide range of income and expenditure, such as:

  • Salary and employment income.
  • Bonuses, commissions and overtime.
  • Part-time employment pay.
  • Self-employed pay, including dividends.
  • Pension funds.
  • Variable income from contracts or temporary work.
  • Investment returns.
  • Maintenance costs.
  • Government benefits in some situations.

What Happens at the End of my Secured Interest-Only Loan?

When you reach the end of the term, you need to pay back the original loan value. This will be via the repayment strategy presented to your lender at the time of application.

Common repayment strategies include:

  • Cashing in savings or an ISA.
  • Selling another portfolio property.
  • Selling investments, such as stock, shares, unit trusts or bonds.
  • Selling the property.
  • Tax-free pension withdrawals.
  • Using an endowment policy - although reasonably unusual.
  • Using an inheritance.

If you have a problem with your exit strategy, there are a few options available:

  • Raising cash to repay the debt.
  • Remortgaging - either with your existing lender or a new provider.
  • Remortgaging to a repayment mortgage.
  • Selling the property.
  • Using an equity release product if approaching, or past retirement age.

In some cases, you might have reached retirement age during the loan term, and find it difficult to remortgage if you are over the age cap set by some lenders (usually up to 70 or 75, and sometimes as high as 85).

Some specialist lenders have no age caps at all, and there are equity release products designed to applicants over 55.

If you find yourself in this scenario, contact mortgage brokers, and we will run through the options with you.

What is the Worst-Case Scenario if I Can't Repay a Secured Home Loan?

The worst-case scenario is that you cannot repay the debt, cannot refinance, and cannot sell the property.

In this case, the lender could repossess the property, and sell it to recoup the debt.

However, repossession is a last resort, and something a lender will actively avoid in favour of other solutions.

Can I Get an Interest-Only Secured Loan if I Have Bad Credit?

Potentially, yes, and secured loans are more flexible than mortgages so that lenders can offer a little more leeway.

Specialist bad credit lenders can consider applications even when the following appear on your credit history:

  • Late payments or defaults.
  • CCJs.
  • Mortgage arrears.
  • IVAs or DMPs.
  • Bankruptcy or repossession history.

The first step is to request a copy of your credit file, to examine the information, see how your score looks, and query any errors or inconsistencies.

Contact Revolution for bespoke advice about lending options in a bad credit situation.

Professional Advice For UK Secured Interest-Only Home Loans

Whether you're looking for a second mortgage, want to explore interest-only borrowing options, or would like to understand what lending you might be eligible for, contact the Revolution Brokers team.

As an independent, whole-of-market broker, we recommend any product from any lender that we think is best for you, as well as leveraging our experience to negotiate rates and terms on your behalf.

Why Revolution Brokers?
  • Whole of market brokers

  • Mortgage that suits you

  • On time customer support

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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