A secured loan is used to borrow money against an asset you own, typically your home. Because of this interest rates are often lower than a personal or unsecured loan. But your home may be at risk if you can’t keep up payments.
Secured loans are popular for funding major home improvement projects or consolidating debts.
How do homeowner secured loans work?
To qualify for a homeowner secured loan, you must have a first charge mortgage on your home.
The amount you can borrow is tied to the available equity you have in your home. For example, if your house is valued at £500,000 and you have an outstanding first charge mortgage balance of £200,000 then your equity is £300,000. This equity, plus your income, credit rating, and ability to pay back the loan will determine how much a lender will let you borrow.
You can apply for a secured loan either through an intermediary or directly with some lenders, such as Optimum Credit.
Potential advantages of a secured loan
Because the borrowing is secured against your property:
- You can borrow larger amounts than you can through a personal unsecured loan
- You can borrow over a longer period than a personal loan
- The interest rate and monthly payments may be lower than if you borrowed a similar amount through a personal loan
- It’s often easier to qualify for a secured loan. This is especially true if you have a less than perfect credit rating or an unusual source of income
If you don’t want to lose your current mortgage deal, taking out a second secured loan may be a better option than re-mortgaging. For example, you may have a great rate or interest–only mortgage.
What to consider before applying for a secured loan:
- Your property or asset is at risk if you fail to keep up with your payments
- Although interest rates on a secured loan are often lower you may end be paying over a longer–term. This means your total cost of repayment could end up higher than a personal loan
- Some lenders may charge hefty early repayment fees or charges
Secured loans for debt consolidation
A secured loan could be a good option for consolidating debts if you:
- Owe a large amount and want to combine it into one monthly payment
- Need to reduce your monthly payment amount
You should always take advice on the best way to consolidate your debts. There are other options available for smaller amounts. For example, a 0% interest credit card or a personal loan may be more suitable.
Secured loans for self–employed
Borrowing money when you’re self-employed can prove tricky. However, this isn’t necessarily the case when applying for a secured loan. Because the loan is secured against a property, most lenders are comfortable lending to self-employed applicants providing their income can be verified.
Typically, the lender will ask for an accountant’s certificate, SA302s, income tax assessments or the last two years’ accounts confirming income.