Compare lenders and rates
If you borrowed £41,000.00 over a 14-year term at 8.89% p.a. (variable), you would make 168 monthly payments of £479.45 and pay £80,547.60 overall, which includes interest of £34,557.60, a broker fee of £3,995.00 and a lender fee of £995.00. The overall cost for comparison is 11.6% APRC representative.
Loans secured against a property, also known as homeowner loans or second-charge mortgages, allow homeowners with a mortgage to use the equity in their home as security to borrow larger amounts (over £10,000) or to borrow at more competitive rates.
There’s a little extra admin involved – like verifying the value of the property and the extent of any other borrowing secured against it – which can eat into lenders’ margins, making smaller loans less appealing. The process takes a little longer than an unsecured loan (perhaps a few weeks rather than a few days) but since there usually aren’t solicitors involved, it’s still typically faster than a regular mortgage would be. No offence, solicitors.
Pros and cons of homeowner loans
- Because the security you put forward reduces the risk to the lender, you may be able to borrow larger sums.
- Similarly, you may be able to spread repayments over longer terms
- You could access a better rate by providing security.
- A good broker can guide you through the process.
- Longer turnaround time than many other forms of borrowing.
- There are usually fees involved.
- Despite better rates, repaying over a longer term could make for a more expensive loan overall.
- Your home is on the line.
What is a secured loan?
With a secured loan, you put up a personal asset as collateral – it could be a car, a boat, a collection of Star Wars memorabilia… but most commonly it’s a property.
If there’s already a mortgage on that property (which in itself is probably the most common form of secured lending), then an additional loan against the property has what’s known as a “second charge” over it. In other words, that lender would be next in line (after the main mortgage provider) to recoup its losses from the sale of the property.
Whatever asset you use as security, it stands to be repossessed if you fall behind on the loan repayments – that’s why you’ll always see/hear/read the standard “Your home is at risk if you do not keep up repayments…” warning on adverts for loans involving security. Repossessed assets are then usually sold off by the lender, enabling them to recoup their losses. If there’s any money left over once the lenders expenses have been covered, it’ll be returned to the borrower. Needless to say, as well as putting your home at risk, defaulting on a secured loan will hurt your credit score pretty badly – making it harder and more expensive to get loans in the future.
When you’re comparing loans, you might see the term “homeowner loan” cropping up, but it can be misleading. Some types of loan can be cheaper if the borrower is a homeowner, but that doesn’t necessarily mean that the loan is secured against the home. Before you take out any loan, make sure you understand what security’s involved. In this guide, we’re focusing on loans that are secured against your house.
Secured loans are perhaps most popular with those looking to consolidate debt, but can also be a way to access funds without disrupting an existing mortgage – perhaps for people enjoying a very low fixed rate or people whose credit rating has been severely damaged since taking out their mortgage.
The big banks don’t dominate the secured loans market (perhaps because they’re more interested in larger, traditional mortgages), instead you’ll see a large number of specialist lenders that are less likely to be household names – Optimum Credit is perhaps the largest of these.
How to compare homeowner loans
Here are some of the key factors to bear in mind:
- Total cost. The most important factor to consider when comparing almost any loan is the total cost. The APRC (which all lenders must calculate in the same way) is a good benchmark for what a loan will cost you each year – taking into account both interest and any mandatory fees, but the overall cost is an even better metric. That’s because if you borrow at a low interest rate, but you borrow for a long time, it can still work out very expensive. Don’t forget, however, that interest rates change over time, unless they’re “fixed”. As such, if your loan is based on a “variable” rate (which is normal for longer-term loans), the overall cost is subject to change. Unfortunately, hefty fees are the norm in the world of secured loans, with product fees of anywhere up to 10% of the amount being borrowed.
- Amounts and terms available. The longer the term length, the lower your monthly repayments will be. However, the total cost of your loan will be more as you’re paying interest for longer. Choose the shortest term length you can, with monthly repayments that are affordable for you. Most lenders offer terms of up to 25 years, although some will stretch to 30 years.
- Flexibility. Can you repay the loan early? Is there a penalty for doing so? Will it save you money in interest? Each lender will have it’s own policy covering facilities like early repayment and even repayment holidays. Most lenders do charge an early redemption fee of some sort, but it could be a flat fee or a percentage-based fee (or, worse still, both).
- Eligibility. Before you apply check the lender’s minimum criteria, which could include factors like age, residency, employment and income.
Alternatives to secured loans
For a large loan, you’ll generally need to provide security in the form of a valuable asset. But if you’re looking to improve your odds of being approved for a good deal on a smaller loan and don’t want to put assets up as collateral, then options to consider include:
- Remortgaging. You may wish to consider restructuring your mortgage, rather than running a second consecutive mortgage alongside it. Unless you’re locked into a great fixed-term rate or your credit score has taken a hit, it’s usually smart to remortgage every few years anyway.
- Guarantor loans. With guarantor loans, you must find an individual who agrees to take on your debts if you can’t repay them on your own. This added security make lenders feel more comfortable approving less creditworthy borrowers.
Guarantor personal loans
- Credit cards. Each provider will have different lending criteria for each card. You may find you have more luck being approved for a small loan on a credit card.
Credit-builder credit cards
- Unsecured personal loans. To get good rates on an unsecured personal loan without a guarantor, you’ll usually need good credit.
Unsecured personal loans
Secured loans can be a useful option when you need to borrow larger sums in a relatively short space of time. They give lenders the reassurance needed to approve larger loans and loans to people with less-than-perfect credit ratings. Before applying for a secured loan, consider whether you’re willing to take the risk of having your assets repossessed.
Frequently asked questions
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