A secured loan lets you borrow money using an asset, usually your home, as security.
This can make larger amounts available, but it also increases the risk. If you cannot repay the loan, your home could ultimately be at risk.
How Do Secured Loans Work?
With a secured loan, the lender has security over an asset you own.
For homeowners, this is usually the property. The loan is often taken alongside an existing mortgage, which is why you may also hear it called a second-charge mortgage.
You then repay the loan, with interest, over an agreed period.
How Is It Different From a Mortgage?
Both can be secured against your home, but they serve different purposes.
Your main mortgage is usually the first charge on the property. A second-charge mortgage is separate borrowing secured against the same home.
So, taking a secured loan does not normally replace your existing mortgage. You could have both loans at the same time.
Why Use a Secured Loan?
People use secured loans for different reasons. For example, they may want to pay for major home improvements or borrow a larger amount than is available through an unsecured personal loan.
Some people also use them to combine other debts.
However, being able to borrow more does not mean borrowing more is the right choice. The extra risk needs careful thought.
How Much Can You Borrow?
The amount available can depend on your income, existing debts, credit history and the value of your property.
The lender will also consider how much you already owe on your home.
For example, a property worth £300,000 with a £250,000 mortgage has much less available equity than the same property with only £100,000 left to repay.
Your circumstances and the lender’s own rules will also affect what is available.
What Is Equity?
Equity is the difference between the value of your home and the amount secured against it.
For example:
Home value: £250,000
Mortgage balance: £150,000
Equity: £100,000
This does not mean you can automatically borrow the full £100,000. The lender will still decide how much it is prepared to lend.
Also, property values can fall as well as rise.
Check the Total Cost
A secured loan can have a lower interest rate than some unsecured borrowing. However, that does not automatically make it cheaper.
These loans can run for many years, so you may pay interest for much longer.
For example, a lower rate spread over 15 years could cost more overall than a higher rate repaid over a much shorter period.
Always compare the total amount repayable, not just the interest rate or monthly payment.
Watch the Loan Term
A long repayment period can make a large loan look surprisingly affordable each month.
But there is a trade-off.
Lower monthly payments can mean many more years of interest. You may also still be repaying something long after the item or work you originally borrowed for has lost its value.
Choose the term carefully rather than simply stretching it until the payment fits.
Fees and Charges
There may be costs as well as interest.
Depending on the loan, these could include arrangement, valuation, legal or broker fees.
Some fees may be added to the loan rather than paid upfront. If that happens, you could also pay interest on them.
Check what you will pay and whether any fees are being added to the amount borrowed.
Fixed or Variable Rate?
A secured loan may have a fixed or variable interest rate.
With a fixed rate, the interest rate stays the same for an agreed period.
With a variable rate, it can change. This means your payments or borrowing costs could rise.
Before agreeing to the loan, check how the rate works and what could make it change.
Can You Repay Early?
You may want to repay the loan early if your finances improve or you sell your home.
However, early repayment charges may apply.
Check the agreement before borrowing. If you already have the loan, ask the lender for a settlement figure so you know what it would cost to clear.
Using Your Home to Clear Debt
A secured loan can sometimes combine credit cards, personal loans and other debts into one payment.
This may reduce the monthly amount you pay. However, there are two important risks.
First, you may repay the new loan over much longer, which can increase the total cost.
Second, unsecured debts may become debt secured against your home.
So, a smaller monthly payment does not necessarily mean you are better off.
Avoid Building Up Debt Again
Debt consolidation only helps if the underlying debt problem is dealt with too.
For example, using a secured loan to clear credit cards and then building up new card balances could leave you with both the secured loan and new credit card debt.
Before consolidating, understand why the debts built up and whether your budget works without further borrowing.
If you are already struggling, free debt advice may be a better first step.
Secured or Personal Loan?
A personal loan is normally unsecured, while a secured loan uses an asset such as your home as security.
Secured borrowing may allow you to borrow more or repay over longer. However, this comes with greater risk.
If an unsecured loan, savings or another suitable option could meet the same need, compare them before putting your home at risk.
Do not choose secured borrowing simply because the monthly payment is lower.
Secured Loan or Remortgage?
Homeowners looking to raise money may also consider remortgaging.
With a remortgage, you change or replace your main mortgage and may increase the amount borrowed.
With a second-charge secured loan, your existing mortgage normally stays in place and the new loan sits alongside it.
Which costs less depends on your circumstances. For example, changing a good existing mortgage deal could be expensive, while a second loan may have a higher rate or additional fees.
Compare the whole cost of both options before deciding.
What If You Move Home?
A secured loan can affect what happens when you sell your property.
Money secured against the home will normally need to be dealt with as part of the sale. This can reduce the amount of equity left for your next home.
If you expect to move, check what would happen to the loan and whether early repayment costs would apply.
If You Cannot Pay
Contact the lender as soon as you think you may struggle.
Because the loan is secured against your property, missed payments are serious. Continuing problems can eventually put your home at risk.
Do not ignore letters or wait for the debt to grow.
If you are struggling with several debts, consider getting free independent debt advice before taking on more borrowing.
Before You Borrow
First, ask why the loan needs to be secured against your home.
Then compare the amount borrowed, interest rate, fees, monthly payment, loan term and total amount repayable with other suitable options.
Most importantly, consider the risk.
Turning short-term or unsecured borrowing into a long-term debt secured against your home can have serious consequences.
Key Points
- Secured loans use an asset, usually your home, as security.
- A second-charge mortgage normally sits alongside your main mortgage.
- A lower monthly payment does not necessarily mean a cheaper loan.
- Longer terms can greatly increase the total interest paid.
- Think carefully before using secured borrowing to clear unsecured debts.
- Compare a secured loan with other suitable options.
- Your home could be at risk if you cannot keep up the repayments.
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