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A secured loan, also known as a homeowner loan or second charge mortgage, is an option if you need to access the equity in your property; but is this the right choice for you?
Here we explore the advantages and disadvantages of secured loans and compare them to alternative types of finance to help you decide.
Is a secured loan a good idea?
A secured loan can be beneficial in certain situations, mainly if you need to borrow against the equity in your home and have ruled out alternatives such as remortgaging.
These loans can be costly, but are often a viable option for those who don’t want to make changes to their existing mortgage or can’t because they are fixed into it.
Although the rates are generally higher for second charge mortgages compared to first charge, they are lower than for unsecured loans and the borrowing caps are higher.
Read on to find out more about the pros and cons of secured loans.
Advantages of secured loans
The main benefits of a secured loan compared to other products are:
High borrowing caps
As these loans are secured against a valuable asset (usually a property) lenders can take greater risks with the amount they let you borrow compared to unsecured agreements. You will usually need at least 10-15% equity in your property, but with this requirement met, the monetary amount you can potentially borrow is higher than with alternative products.
Flexible criteria
Secured loans are often a lifeline for borrowers who have been rejected for a capital-raising remortgage on eligibility grounds. This is because the criteria for homeowner loans is often more flexible, especially for homeowners with adverse credit or a low credit score.
Secured loan lenders also tend to place fewer caveats on the purpose of the funds, with these products being suitable for any legal purpose, from renovations to dream holidays.
Relatively fast to arrange
One of the main advantages second charge mortgages have over remortgaging to release equity is their speed. You can be ready to complete the secured loan process within a few weeks, while a remortgage with capital raising can take months, with extra steps to navigate.
Wide product choice
Like first charge mortgages, second charges come with a range of different options including fixed and variable rate loans and a choice between interest-only and capital repayment types. There are also a wide range of terms available, spanning 3-35 years.
Your first charge mortgage can remain unchanged
Many homeowners who opt for secured loans do so because they want to keep their existing mortgage unchanged. Remortgaging could mean ending up with a higher interest rate or being strung by penalties, two pitfalls a secured loan can help you avoid.
Disadvantages and risks
The main drawbacks to be aware of are as follows:
Rates and fees can be high
Interest rates on second charge mortgages are generally higher than first charge mortgages (although they are typically lower than unsecured loans) and the fees can be higher too.
Think carefully about the overall cost with any fees factored in if you have narrowed your options down to a remortgage or a secured loan.
Higher risk of repossession
You are more likely to lose your home in the event of an unexpected life event, such as a redundancy, if you have two substantial debts tied to it. There will also be extra damage to your credit files if you were to default on both the secured loan and your mortgage.
Using them for debt consolidation can mean paying more overall
Debt consolidation is a popular reason homeowners take out secured loans, but it’s important to keep in mind that putting debt onto your property means paying interest on it for the duration of the term, likely a longer period than the debt itself will have been for.
It’s worth seeking professional advice before adding debt to your home. A mortgage broker can discuss the pros, cons and potential alternatives with you.
The application process can be complex
One added complexity to the secured loan application process is the fact your first charge lender will need to consent to an additional charge being placed on your home. The lender will also place extra scrutiny on affordability, as they will need to be confident that you can service both debts at once, which can add to the overall timescale.
Other types of finance, such as unsecured loans, are quicker to arrange.
How we can help you lower the risk
The level of risk can be high when you are placing an extra charge on your property, which is why it’s a good idea to only do it with the help of a professional.
At Teito, there are members of our team who are experts in secured loans, and they can help you decide whether this is the right product type for you. They can review all of the pros, cons and alternatives with you to make sure you make an informed decision.
With an expert on your side, you can avoid any of the potential pitfalls and increase your chances of landing the most cost-effective deal available.
You can arrange a free, no-obligation chat with a secured loan adviser below:
Connect with a secured loans specialist
Alternatives to consider
The main alternatives to a secured loan are the following types of finance:
- Remortgaging: You might want to explore the popular method of remortgaging and switching to a new mortgage to release equity and free up funds. This can be a viable option if there are no hefty early repayment charges involved and you don’t mind making changes to your agreement, such as locking into a new rate.
- Equity release: If you’re over 55, you could use a lifetime mortgage or home reversion plan to release equity and access additional cash.
- Unsecured loan: If you want to borrow less than £10,000, an unsecured personal loan might be easier because you don’t need to secure it against your property.
- Credit card: You might be able to use a credit card or even an overdraft if you only need to borrow a smaller sum for a relatively short period of time.
- Second charge bridging loan: It might be worth looking into second charge bridging loans, which can be regulated or unregulated depending on how much flexibility you need.
Why choose Teito for your secured loan?
Now that you have read up on the pros and cons of secured loans and considered the alternatives, you can connect with one of our secured loan advisers to discuss your options.
There are members of our team who specialise in this type of finance, and they have the knowledge, experience and lender contacts to help you get the best possible deal.
Here are just some of the reasons people choose us for their secured loan needs:
- Our brokers specialise in second charge mortgages
- They can access exclusive rates and deals
- We are 5-star rated on leading review websites
- We can offer support throughout the application process
Read to take advantage of a free, no-obligation chat with a broker who specialises in homeowner loans to find out what your options are? Get started here.
FAQs
There are a few scenarios where you might consider an unsecured loan as an alternative, one being that you only need to borrow a small amount. Anything under £25,000 that you are confident of paying off relatively quickly may not need to be a secured debt.
Furthermore, an unsecured loan can be a fallback option if you are rejected for a second charge mortgage on affordability or eligibility grounds.
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.