Secured Loans Explained

If you’re looking to borrow a significant sum and want to use property as collateral, a secured loan could be the type of finance you need. Here we’ll cover all you need to know about how UK secured loans work, including calculating how much you can borrow and important details about lenders and rates.

What is a secured loan?

A secured loan is a form of borrowing that uses an asset like your property as security (collateral). Secured loans are also called ‘homeowner loans’ or ‘second charge mortgages’, but they all mean the same thing. A secured loan against a property is the most common and accessible type for the majority of people.

How do they work?

Using a high-value asset like property as security for a loan means lenders can let you borrow large sums with competitive rates. This is because if you fail to repay the loan, they can recoup any losses by taking control of the property you used as security. This significantly reduces the risk for lenders.

For example, if you’re a homeowner, you can borrow against the equity you own in the home. This is where the term ‘second charge mortgage’ comes from. Your initial mortgage would be a ‘first charge’ (primary mortgage) and then a secured loan against your property would be classed as a ‘second charge’.

What they can be used for

Homeowner loans can have many practical uses, but some of the most common include:

• Home improvements: Renovations, extensions, loft conversions, creating outbuildings or office sheds, energy-efficiency upgrades, and major repairs.
• Big ticket purchase: New car, wedding, dream holiday, or education fees.
• Debt consolidation: A secured loan for debt consolidation combines your high-interest debts into one payment secured against your property.
• Business investment: Starting a new business, growing an existing enterprise, or investing in someone else’s business. 

Read a case study about one of our satisfied secured loan customers

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Full lending criteria

Here are the main considerations for lenders when evaluating a secured loan against a property:

• Asset and equity: You must own the property if you want to borrow against it with a secured loan. The amount you can borrow and the interest rate you get for a second charge mortgage partly depends on how much equity you can use as security, and how much you want to borrow.
• Combined LTV: Each lender will look at your current loan-to-value (LTV) ratio for your original mortgage and then work out your total LTV once the extra borrowing is factored in. Most lenders will have maximum LTV caps of around 85%, but some will go higher.
• Loan purpose: Most lenders want to know your plans for the additional funds. Certain lenders specialise in different areas and offer varying terms or LTV maximums depending on your plans. For example, some look favourably on homeowner loans if they’re used for a specific purpose like a renovation that could add value to your house. 
• Credit history: Lenders will look at your credit reports to get an idea of your current finances and past credit history. Typically, the best secured loan rates will go to those with the best credit history, but not always. If you have bad credit, don’t panic, you can still get a competitive secured loan with bad credit. 
• Debt-to-income (DTI): With a second charge mortgage, lenders will check your debt-to-income (DTI) ratio. This is calculated by dividing your existing monthly debt payments (including your mortgage) by your gross monthly income (your pay before tax). Typically, lenders prefer if your DTI is under 40%.
• Income: Your current income can play a role in a lender’s decision. Ideally, most lenders prefer stable and consistent salary income. So if you’re self-employed, or if part of your income comes from overtime, bonuses, or commission - you’ll likely need to approach a specialist lender to ensure your extra income is used. 

Additional factors are also taken into consideration, such as your age and the amount of money you’re looking to borrow. Each lender will have specific eligibility criteria for secured loans, so it’s crucial you speak to the most appropriate lender.

How much can you borrow?

The amount you can borrow with a second charge mortgage largely depends on how much equity you own in your property (rather than how much you can afford to pay each month). 

Some lenders will let you borrow up to 100% of your existing equity, but most lenders cap your total borrowing at an 85% LTV ratio - this includes your existing mortgage plus your additional homeowner loan. 

If your house is worth £250,000 and you have a mortgage balance of £150,000, your equity is £100,000 - meaning a current LTV of 60%. If you wanted to borrow an extra £62,500 with a secured loan, this would take your total LTV up to 85%.

A small number of lenders will let you borrow more than this, depending on your reason for the secured loan and other eligibility factors.

How to get a secured loan against property

Here are some straightforward steps to follow if you want to get a second charge mortgage:

1. Gather your details: Along with your documents (proof of address, ID, and 3 months of payslips and bank statements), you should get all the details relating to the existing mortgage, your credit reports, and any other debts. It’s also worth having a sensible plan for how you plan to use the secured loan. 

2. Get expert advice: Speaking to an expert advisor means they can take an in-depth look at your existing finances and debt. After evaluating your situation and financial goals for the loan, an experienced advisor can explain all your options for securing the best secured loan rates.

3. Apply for a loan: The major benefit of using a broker is that they can introduce you to a niche or specialist lender that suits your specific situation. So, you can be comfortable in the knowledge that they’ll maximise how much you can borrow while still getting the best secured loan rates available.

If you want to speak to one of our experienced brokers who specialises in secured loans, you can get started here with a free, no obligation chat:

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Best secured loan lenders in the UK

Unfortunately, there’s no single best lender out there for all applicants. The right lender for your second charge mortgage will depend largely on your circumstances and financial goals.

To give you an idea of lending options, this isn’t a comprehensive list of secured loan lenders, rather, a small sample of mainstream lenders to give you an idea of the varying eligibility criteria: 

• Halifax: The minimum amount Halifax will let you borrow is £10,000. When calculating how much you can borrow, your existing mortgage plus the additional homeowner loan must not exceed an 85% LTV. Also, if the LTV is above 80%, you need to arrange and pay for a new valuation.
• Lloyds Bank: You need to have had a mortgage with Lloyds for at least 6 months and you can borrow up to 85% of your home’s value (or 75% if you have an interest-only mortgage), with a £10,000 minimum.
• Nationwide: You can borrow up to 90% of your home’s value with Nationwide, but there are various LTV maximums based on your reason for the loan. For example, if you plan to repay unsecured debts, there’s a max LTV of 80%, but for structural home improvements, the LTV cap is 90%.

Specialist lenders

If your situation is extremely straightforward, then your broker might be able to find you a good deal with high street lenders. However, in most cases, you must have an existing mortgage with them to get a further advance, which can limit your options.

More complex homeowner loan applications are often better suited to specialist home finance providers, such as:

• Castle Trust Bank
• Masthaven
• Norton Home Loans
• United Trust Bank

Getting the best rates and terms for a second charge mortgage usually means approaching specialist lenders - who likely won’t be your existing lender.

Are the rates different to mortgages?

Typically, the rates are slightly higher for second charge mortgages. Part of the reason for this is because homeowner loans tend to be for smaller amounts than the original mortgage.

However, the key factors that will be considered by most lenders when determining your secured loan rates will be your current level of equity, the amount you want to borrow, your credit history, and whether you opt for a fixed or variable rate.

Regardless of your level of equity and credit score, using an experienced broker will increase your chances of getting the best secured loan rates because they can introduce you to specialist lenders and find deals not advertised publicly.

Alternative types of finance

Your broker will be able to walk you through all the most appropriate financing options based on your circumstances and needs, but here are some common alternatives to secured loans:

• Remortgaging
• Equity release
• Personal loan
• Credit card
• Second charge bridging loan

You can read more about the other options available in our guide to secured loan alternatives

Why choose Teito for your secured loan?

Accessing extra funds by leveraging the existing equity in your home with a secured loan can open up some fantastic options and financial flexibility, whatever your goals.

Our brokers have plenty of experience getting the best rates for second charge mortgages and homeowner loans. Their industry expertise and relationships with specialist lenders mean they can get the results you need.

Here are some of the reasons people choose Teito for their secured loans:

• Our brokers specialise in secured loans - read a relevant case study here
• Your initial consultation is free with no obligation to proceed
• We can introduce you to niche lenders with the best rates
• We are 5-star rated on leading review sites

Ready to take advantage of a free, no-obligation chat with a broker who specialises in secured loans? Get started here.