You need £50,000 for home improvements but the monthly personal loan repayments are making your eyes water.
You’ve heard about secured loans but aren’t sure how the whole process actually works. The good news is that secured loans follow a straightforward process that lets you borrow against your home’s equity whilst keeping your existing mortgage completely separate.
Understanding exactly how secured loans work puts you in control of the process. You’ll know what to expect at each stage, how the numbers are calculated, and what happens from application through to getting your money.
How Secured Loans Actually Work
Stage 1: Initial Assessment
The process starts with working out how much you can borrow.
Let’s use a real example.
Say you own a £550,000 house with £180,000 left on your mortgage. Your equity is £370,000 – the difference between your property’s value and what you owe.
Secured loan lenders will lend up to 80-85% of your property’s total value across both your existing mortgage and the new loan.
In this case, that means total borrowing of around £440,000-£470,000. Since you’ve already got £180,000 on your mortgage, you could potentially borrow another £260,000-£290,000 through a secured loan.
Stage 2: Understanding the Security
Here’s where the “secured” part works.
Your mortgage lender holds the first charge on your property.
The secured loan becomes a second charge, registered at the Land Registry. This gives the secured loan provider legal claim to your property if you don’t repay them, but they sit behind your mortgage lender in the queue.
Your existing mortgage stays completely unchanged. Same lender, same rate, same monthly payment.
The secured loan becomes an entirely separate arrangement with a different company.
Lender Consent
Your existing mortgage lender will need to give their approval before a secured loan charge can be registered. The second charge lender will write to them, requesting their acceptance of the charge.
If this request is denied then the secured loan cannot proceed any further.
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The Application Process
Getting Your Documentation Ready
The application process works similarly to getting a mortgage, but with less complexity. You’ll need to get some documents together; proof of income, recent bank statements, details of your existing mortgage, and information about other debts.
Self-employed applicants need accounts or tax returns, but requirements are generally less strict than for mortgages. Lenders assess your ability to afford the new monthly payment alongside your existing commitments.
Property Valuation
The lender arranges a valuation of your property to confirm its current value and suitability. The surveyor checks for any issues that might affect the property’s marketability or value.
This valuation determines exactly how much you can borrow. If the figure comes back lower than expected, your borrowing limit drops accordingly. If it’s higher, you might be able to borrow more than initially thought.
Legals
The legal work happens alongside underwriting. You usually need a solicitor to represent your interests, whilst the lender has their own legal team. The main job is registering the second charge at the Land Registry and ensuring all documentation is properly completed.
Some lenders will cover the cost of this process.
Costs and Payments
Interest Rate Calculation
Secured loan interest rates sit between mortgage rates and personal loan rates. The exact rate depends on your credit score, loan amount, property value, and loan-to-value ratio.
Monthly Payments
Once your secured loan completes, you’ll have two separate monthly payments. Your existing mortgage payment continues unchanged to your current lender. The secured loan payment goes to a different company entirely.
If you borrowed £60,000 over 15 years at 7% interest, your monthly payment would be around £540. This sits alongside your existing mortgage payment – they don’t combine or interact with each other.
Additional Costs
Budget for arrangement fees (usually 1-2% of the loan amount), valuation costs, and legal fees. Some lenders charge exit fees if you repay early. Always check the total cost, not just the interest rate.
How Different Scenarios Work
Secured loans work differently depending on what you’re using the money for, and lenders view some purposes more favourably than others.
Whether you’re planning home improvements, consolidating debts, or funding a business venture, each approach has its own considerations and advantages.
Home Improvements
For home improvements, the process normally goes well because you’re adding value to the security. Lenders prefer these applications because improvements increase property value, strengthening their security position.
Debt Consolidation
Debt consolidation works by using the loan proceeds to pay off existing unsecured debts. The lender might pay creditors directly to ensure debts are actually cleared rather than giving you the money to sort out yourself.
This can dramatically reduce your monthly outgoings if you’re consolidating expensive credit card debts or personal loans into one lower-rate secured loan payment.
Business Funding
For business funding, lenders want to understand how the money will be used and how it improves your ability to repay. Some require detailed business plans, whilst others are happy with basic explanations if your overall financial position is strong.
Assessment focuses on your personal ability to service the debt rather than detailed business cash flow projections.
What Happens if You Want to Move House?
Presuming that you still need the secured loan, there are two main options:
1 – Take the secured loan with you
It may be possible to transfer the secured loan over to your new home. This will depend on; the lender agreeing to it, the mortgage company agreeing to the new second charge.
Alternatively, the lender may want to issue a new secured loan, replacing the one you have.
2 – Get a bigger mortgage
Generally speaking, secured loan interest rates are higher than mortgage rates. So if you can apply for a bigger mortgage, the extra money can be used to repay the secured loan, and you are back to just one mortgage on your new property.
Chat this over with your mortgage adviser before making any firm decisions.
Alternatives
Before committing to a secured loan, it’s worth understanding other borrowing options that might work better for your specific situation.
Each alternative has different advantages and works best in particular circumstances.
Remortgaging
Remortgaging replaces your entire mortgage, potentially giving you access to additional funds at mortgage rates. This works brilliantly if current mortgage rates are similar to or better than your existing deal.
The downside is losing any excellent rates you currently have. If you’re on a 2% deal from 2021 and current rates are 5%, remortgaging could cost hundreds more monthly even before considering the extra borrowing.
Remortgaging also takes longer than secured loans, often 6-8 weeks, and involves more paperwork.
Further Advance
A further advance lets you borrow additional money from your current mortgage lender, which gets added to your mortgage account without changing the main deal. This preserves your current interest rate on the original borrowing whilst adding new funds at current rates.
Further advances work well when you want to keep your excellent existing rate but need additional funds.
Your lender assesses the new borrowing separately, so you might face different criteria or rates for the additional amount.
Not all lenders offer further advances, and those that do often have restrictions on purposes or amounts.
The process is usually quicker than full remortgaging since you’re staying with the same lender, but slower than secured loans due to mortgage regulations and processes.
Read more: Second charge vs further advance
Unsecured Personal Loans
Personal loans work well for smaller amounts, usually up to £25,000-£35,000 with mainstream lenders. They’re unsecured, so your home isn’t at risk, and the application process is much faster than secured loans.
However, interest rates are significantly higher than secured loans, especially for larger amounts. If you can get a personal loan at all for substantial sums, rates often sit in double digits. For amounts over £15,000, secured loans usually offer much better value.
Personal loans also have fixed terms with no flexibility for early repayment without charges, and missed payments can seriously damage your credit score.
Read more: What’s the Difference Between a Secured and Unsecured Loan?
Business Loans for Business Purposes
If you need funds for genuine business purposes, dedicated business loans might offer better terms than secured loans. Business loans focus on cash flow and business viability rather than personal circumstances.
However, business loans often require detailed financial projections, business plans, and sometimes personal guarantees anyway. The application process can be lengthy and complex compared to secured loans.
Many business owners find secured loans simpler and faster for business funding, especially when personal circumstances are stronger than business metrics.
How to Work with Brokers
Your mortgage adviser will be able to assess whether a remortgage or further advance would be more suitable for you, including calculating costs and fees.
Once a second charge loan has been agreed as the best way forward, they can access secured lenders who don’t deal directly with the public. Many of the most competitive secured loan providers only work through intermediaries, so going direct often means missing better deals.
The broker process starts with assessing your circumstances and matching you to suitable lenders. They know which lenders accept different types of applications and how to present cases for best results.
You’ll get help with the paperwork, documentation, and any questions that crop up while the application is being processed.
Frequently Asked Questions
The complete process usually takes 4-6 weeks from application to receiving your money. This includes property valuation (1-2 weeks), underwriting (1-2 weeks), legal work (2-3 weeks), and completion. Straightforward cases sometimes complete faster, while complex situations might take longer.
Read more: How long does it take to get a secured loan?
Nothing changes with your existing mortgage. You keep making the same monthly payments to your current lender at the same interest rate. The secured loan becomes a completely separate monthly payment to a different company.
Yes, secured loan lenders are often more flexible with self-employed applicants than personal loan providers. You’ll need recent accounts, tax returns, or tax calculations to prove income. The property security makes lenders more willing to look beyond complex income patterns.
A conveyancer is needed to handle the second charge registration at the Land Registry. A lot of lenders will carry this out on your behalf.
These loans are flexible, so most purposes are acceptable including home improvements, debt consolidation, business funding, or large purchases. Lenders prefer money going towards value-adding projects rather than speculation or gambling. Some restrict use for buying other properties, which needs specialist lending.
Read more: What can you use a secured loan for?
Poor credit doesn’t automatically disqualify you because the property provides security. However, you’ll face higher interest rates and potentially stricter terms. Some specialist lenders focus specifically on applicants with credit issues, though rates will reflect the increased risk.
