Secured loans are a type of mortgage and they can be useful if you need to borrow a large sum of money, typically £10,000 or more.
To get one you need to be a homeowner, it’s OK if you still have a mortgage, and you need to have equity in your home. It’s this equity that a secured loan will access to free up some money for you.
As it’s a mortgage you need to make sure that borrowing the extra amount is affordable, as it puts your home at risk. The good news is that the lenders are pretty relaxed about how you spend the money.
This guide looks at what a secured loan is and what you can use it for.
What is a secured loan?
To begin, we will explain how this type of loan works.
A secured loan is known by a few different names, including; 2nd charge mortgage and homeowner loan. There’s no discernible difference between any of these.
Most importantly, it is a loan that is legally secured on a property, often your own home.
By their nature, a secured loan is a second legal charge on your home, with your main lender in prime position with a first charge. It’s effectively a second mortgage.
For example:
- You have a main mortgage with the Halifax (first mortgage)
- And a second charge mortgage with Shawbrook Bank (second mortgage)
- You will make separate monthly repayments to each lender.
This separate article explains what a second charge on a property means.
Can anyone get a secured loan?
It would be misleading of us to say yes, anyone can get a secured loan.
These loans are only available to existing homeowners, who must have adequate equity in their home.
Not everyone will be accepted for a homeowner loan. But the good news is that the lenders are quite flexible, with loans granted to borrowers who have been turned down by their own bank.
As the loans are secured on your home, many lenders will also accept a small amount of bad credit, as they always have your property to fall back on in the event of default.
It’s a good idea to check what documents are needed for a secured loan before you make an application.
If you don’t own your own home then you won’t be eligible for a secured loan or mortgage. But depending on why you need the money, you may have success with an unsecured personal loan or hire purchase borrowing.
If you own rental properties then there are second charge mortgages for buy to let investors.
So what can you use a secured loan for?
The companies that offer secured loans are pretty relaxed about why you might need a loan, and what you will use the money for.
When you borrow money from a high street lender they tend to have strict rules about what the money will be used for, with the most popular reason borrowing to pay for home improvements. Occasionally, this will mean borrowers need to look further afield for a more amenable lender. You can use the money for almost anything you like. Here’s a few examples:
Debt consolidation
This is certainly one of the more popular reasons.
If your unsecured debts have become unmanageable then combining them into one secured loan could make the monthly payments smaller and more affordable.
Home improvements
If you are looking to build an extension, convert a loft or maybe install a new kitchen then a secured loan can help.
It can generate a cash sum that could cover all of the costs, or maybe just pay off a sizeable chunk.
Property investment
Tapping into your equity is a convenient way of generating cash to help purchase an additional property. Perhaps as a deposit towards a buy to let or second home.
Business cashflow
You could use the money to inject some capital into your business to improve its cash flow or to buy more stock.
It’s even possible to buy a business, or maybe buyout another shareholder.
Remember – These are just examples but most lenders will accept most reasons.
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How much can you borrow with a secured loan?
Like any other mortgage the amount you can borrow is influenced by three things:
- Your income
- The property value
- Amount of existing mortgage/secured debts
The lender needs to satisfy itself that you have adequate income to cover the new monthly repayment amount. They will look at your income as well as your outgoings.
Then an assessment needs to be made on your equity. This is the amount of your home that you own outright.
If you start with the value of your home and then deduct the secured debts, the amount left is your equity.
The lenders that offer homeowner loans have funds available from £10,000 to £1 million. You need to choose a repayment term and this can be from 5 years to 35 years but your age will affect your eligibility.
The lender’s loan to value (LTV) is the maximum overall percentage of your home’s value that can be mortgaged, but this includes your current mortgage. An LTV of 90% should be achievable, depending on your income.
Here’s a quick example:
| Property value | £500,000 |
| Outstanding mortgage | £200,000 |
| Equity | £300,000 |
| Loan to value LTV | 40% |
| Secured lender’s maximum LTV | 90% |
| Overall borrowing maximum (90% of 500k) | £450,000 |
| Less existing mortgage | £200,000 |
| Maximum available to borrow | £250,000 |
A word of caution
It can seem tempting to apply for a second charge mortgage, when the lenders are eager to lend, and you have a good amount of equity. But it’s important to remember that any loan is secured against your home. This reduces your equity and may prevent or delay you from moving home in the future.
In the event of non-payment, the lender’s last resort will be to repossess your home and then sell it (for less than it’s actually worth) to repay their debts and costs.
If you do need to borrow a sizeable amount of money then allow a qualified mortgage broker to help you. They will be able to assess whether a remortgage is possible, and if not, find a competitive secured loan for you.
If you are consolidating debts such as personal loans and credit cards then you should be able to dramatically cut your monthly payments. This is fine if that is the priority. But remember that a second mortgage is more expensive than a first/main mortgage and by spreading your unsecured debts over a longer period you will be paying a lot more interest.
FREQUENTLY ASKED QUESTIONS
Can you use a secured loan to buy a house?
Yes. The money you raise could be used to pay for another house outright (as a cash buyer) or it could be used as a deposit.
Is a further advance a second charge?
No. A further advance is additional money that you have borrowed but from your main mortgage lender. In this article we compare second charges against further advances.
How long does it take to get a secured loan?
It would normally take around 2-4 weeks for the application to be approved.
Are they available to self-employed borrowers?
Yes. Borrowers can be employed or self-employed.
Can you get a secured loan with bad credit?
Yes you can. Secured loan lenders do understand about bad credit and will be able to overlook certain entries on your credit report.
Is a remortgage better?
A remortgage would normally be better as the interest rates are lower. This would certainly be the first option to consider, before looking into homeowner loans.
Are secured loans more expensive?
Secured loans are normally cheaper than unsecured loans, but are more expensive than a normal remortgage.
Is a survey required?
This depends on your loan to value but most applications would require your home to be valued.
Are secured loans regulated by the FCA
If the loan is secured against your main home then it will need to be regulated by the Financial Conduct Authority. Learn more.
How many mortgages can you have?
This is quite difficult to answer but you may like to read this guide which provides a basic overview.
