Secured Loans Explained

Posted by Together on 30th January 2023 -

In this simple guide we explain how secured loans work, the different types of secured loan, and the situations where a secured loan might be the most suitable option.

 

If you’re looking to remortgage because you need to borrow additional funds – perhaps to pay for renovations, or to consolidate existing debts – you might not realise you have other options without having to resort to unsecured borrowing like a personal loan.

Secured loans – also known in the industry as homeowner loans or second-charge mortgages – allow you to borrow money while using a property as collateral. The term ‘secured’ refers to the fact that your lender will need a property as security in case you can’t pay the loan back. 

If you've built up equity in a property (like one you rent out or your own home), you can leverage it to borrow money without remortgaging out of your current mortgage to pay for renovations or upgrades, for example.

Interest rates on secured loans tend to be lower than what you would be charged on unsecured loans, but as with a mortgage, your property might be repossessed if you fall behind with payments. Therefore it’s important to understand how secured loans work. 

How does a secured loan work?

Unlike remortgaging, a secured loan runs alongside (but completely separate to) your current mortgage, and is secured against the equity you have in your property – which is the difference between the value of your property and the amount you still owe on your first mortgage. 

Taking out a second-charge mortgage means you can keep your existing first mortgage deal, which could be particularly valuable if either interest rates have gone up or your credit rating has gone down. It could also mean avoiding penalties such as Early Repayment Charges (ERC) which may apply if you were to remortgage out of your existing arrangement early. However, keep in mind that you’ll have two mortgages to pay off on the property instead of one. 

As with other types of secured loans, you’ll make set monthly repayments to pay back what you owe, plus any interest. The interest rate is calculated as a percentage of the amount you owe – it may be a fixed or variable rate depending on the loan you’ve chosen. 

Do secured loans require collateral / security?

To take out a secured loan, you need to put down a valuable asset (usually your home) as security. Here at Together we can accept almost any type of property as security, whether you live in a house, a bungalow or a high-rise flat, even if it’s made of non-standard materials like concrete or timber. 

As you’re putting your property (or another valuable asset) on the line, there’s less risk for the lender compared to a personal loan so you may be able to secure a bigger loan and lower interest rate. Secured loans are also called second-charge mortgages because they place a ‘second’ charge against your property behind your mortgage. It means in the unlikely event you can’t make repayments, your property would be sold and the first-charge (your primary mortgage) would be paid off first. 

Not all high street lenders offer secured loans, which is why people may choose to borrow from a specialist property finance expert like Together.

How is an unsecured loan different to a secured loan?

An unsecured loan (or a personal loan) you might get from your bank isn’t attached to your home or any other asset. Because there’s no asset for the bank to claim if you can’t repay them, unsecured loans are typically considered higher risk. You’ll typically need to have a good credit score to be approved for one as this reassures lenders that you’re likely to pay them back. 

Just as with a secured loan, when you take out an unsecured loan you’ll agree to certain terms for repayment, including an interest rate and how long you’ll have to pay back the debt. Credit cards are another type of unsecured credit – they’re also known as revolving credit, meaning you borrow and repay money each month.

A common reason for taking out a secured loan (second-charge mortgage) is that interest rates can be lower than unsecured loans (depending on the lender and your circumstances). If you’re in a secure financial position and will be able to make repayments, a second-charge loan could potentially save you money on interest. You are also likely to be able to borrow more for big investments and large-scale projects.

---

Discover more real estate services and properties on The Landsite 

Read more articles in TLS Insights magazine - Your #1 source for real estate trends, data and insight.