A secured loan – also referred to as a homeowner loan or second charge mortgage – can be a way to release equity from your property. But is this the most suitable option for you?
In this article, we outline the advantages and disadvantages of secured loans and compare them with alternative forms of finance to help you make an informed decision.
Is a secured loan a good idea?
A secured loan can be useful in certain circumstances, particularly if you wish to borrow against the equity in your home and have discounted alternatives such as remortgaging.
While these loans can be more expensive, they may be a practical option for borrowers who either do not want to alter their existing mortgage or are unable to do so because they are tied into a fixed deal.
Although interest rates on second charge mortgages are typically higher than on first charge mortgages, they are generally lower than on unsecured loans, and the borrowing limits tend to be higher.
Advantages of secured loans
The main benefits of a secured loan compared with other types of borrowing include:
High borrowing limits
Because these loans are secured against a valuable asset – usually your home – lenders are often prepared to advance larger sums than with unsecured borrowing. You will usually need at least 10–15% equity in your property, but once this requirement is met, the amount you can potentially borrow is typically higher than with alternative products.
More flexible lending criteria
Secured loans can provide a lifeline for borrowers who have been declined for a capital-raising remortgage on eligibility grounds. Lenders offering homeowner loans tend to have more flexible criteria, which can be particularly helpful for applicants with adverse credit or a lower credit score.
In addition, secured loan providers often place fewer restrictions on how the funds may be used. These products can usually be taken out for any legal purpose, whether that is home improvements, consolidating existing debts, or funding a major purchase.
Quicker to arrange than remortgaging
A key advantage of a second charge mortgage over remortgaging is speed. The secured loan process can often be completed within a few weeks, whereas a remortgage involving capital raising may take several months due to additional checks and legal steps.
Wide range of product options
Much like first charge mortgages, second charge loans come with a variety of features. These include fixed or variable rates, interest-only or capital repayment structures, and terms ranging from around 3 to 35 years.
Keep your first mortgage unchanged
Many borrowers choose a secured loan because it allows them to keep their existing mortgage in place. Remortgaging could mean losing a competitive interest rate or incurring early repayment charges, both of which a secured loan can help you avoid.
Disadvantages and risks
The main drawbacks to be aware of include:
Potentially higher rates and fees
Interest rates on second charge mortgages are generally higher than those on first charge mortgages, although they are usually lower than for unsecured loans. In addition, arrangement fees can sometimes be higher.
It is important to compare the overall cost – with all fees factored in – if you are weighing up a remortgage against a secured loan.
Increased risk of repossession
Because your property is used as security for the loan, there is a greater risk of losing your home if you are unable to keep up repayments. This risk can be heightened if you already have a substantial mortgage alongside the secured loan. Defaulting on both would also cause more severe damage to your credit record.
Debt consolidation may cost more in the long run
Consolidating debts with a secured loan is common, but it can increase the total interest you pay. This is because the debt becomes tied to your property and is repaid over a longer period than many of the original debts.
Professional advice is strongly recommended before securing debts against your home. A qualified mortgage broker can help you weigh up the pros and cons and consider alternative options.
A more complex application process
One added complication is that your existing mortgage lender (the first charge holder) must consent to another charge being placed on your property. Lenders will also conduct a detailed affordability assessment to ensure you can manage both payments, which can extend the timescale.
By contrast, some other forms of borrowing – such as unsecured personal loans – may be quicker to arrange.
Potentially higher rates and fees
Interest rates on second charge mortgages are generally higher than those on first charge mortgages, although they are usually lower than for unsecured loans. In addition, arrangement fees can sometimes be higher.
It is important to compare the overall cost – with all fees factored in – if you are weighing up a remortgage against a secured loan.
Increased risk of repossession
Because your property is used as security for the loan, there is a greater risk of losing your home if you are unable to keep up repayments. This risk can be heightened if you already have a substantial mortgage alongside the secured loan. Defaulting on both would also cause more severe damage to your credit record.
Debt consolidation may cost more in the long run
Consolidating debts with a secured loan is common, but it can increase the total interest you pay. This is because the debt becomes tied to your property and is repaid over a longer period than many of the original debts.
Professional advice is strongly recommended before securing debts against your home. A qualified mortgage broker can help you weigh up the pros and cons and consider alternative options.
A more complex application process
One added complication is that your existing mortgage lender (the first charge holder) must consent to another charge being placed on your property. Lenders will also conduct a detailed affordability assessment to ensure you can manage both payments, which can extend the timescale.
By contrast, some other forms of borrowing – such as unsecured personal loans – may be quicker to arrange.
Alternatives to consider
The main alternatives to a secured loan include:
Remortgaging
One of the most common ways to release equity is by remortgaging to a new deal. This can free up funds if you are not tied in with significant early repayment charges and are comfortable with making changes to your current mortgage, such as moving onto a new rate or term.
Equity release
For homeowners aged 55 or over, equity release products such as lifetime mortgages or home reversion plans can provide access to additional cash without the need to move home.
Unsecured personal loan
If you only need to borrow a relatively small amount – typically under £10,000 – an unsecured loan may be more straightforward, as it does not require you to use your property as security.
Credit card or overdraft
For short-term borrowing or smaller sums, a credit card or authorised overdraft could be suitable alternatives. These can provide flexibility but often come with higher interest rates if balances are not cleared promptly.
Second charge bridging loan
In some cases, a second charge bridging loan may be an option. These can be regulatedor unregulated, depending on your circumstances and the level of flexibility you require. They are generally used for short-term funding needs.
Frequently Asked Questions
There are circumstances where an unsecured loan could be considered as an alternative to a secured loan. For example, if you only need to borrow a relatively small amount – typically under £25,000 – and are confident you can repay it within a short period, it may not be necessary to secure the debt against your home.
Unsecured loans can also serve as a fallback option if you are declined for a second charge mortgage due to affordability or eligibility issues.