Secured Loans

Secured Loans

A secured loan – or second charge mortgage – can be a great way to raise funds without having to re-mortgage, especially if you don’t want to move away from your current mortgage deal.

If you looking to complete a home improvement project, to pay off some debt, or to pay for a special once-in-a-lifetime event, a second charge could be the best solution.

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A secured loan is a loan that is backed by an asset, typically a house. The lender will agree to lend you money on the basis that your asset is used as collateral. By doing this, it gives lenders a higher confidence level that you’ll make the payments on time and in full.

In some ways, there is no difference at all:

  • They’re all homeowner loans, because you can only have one if you’re a homeowner.
  • They’re all secured loans, because they are all secured against your property.
  • They’re all technically types of mortgages. So why all the different names?

Basically, it’s just a matter of the terminology that lenders and brokers use to describe the different products and the slight differences.

When it comes to “first charges” and “second charges”, this is all about the order in which the loans are taken out – and more importantly, about which lender has priority in claiming back their money, in the event that a customer fails to repay the loan.

Let’s start by looking at a mortgage, which is sometimes referred to as a “first charge.” Most people use a mortgage to buy a property. Because of the amount of money needed to do this, the lender has to have some kind of reassurance that they’ll get their money back.

The lenders get this reassurance by registering a “charge” on the property itself. This means that if the customer fails to pay back their mortgage, the lender can get their money back by selling the customer’s house. (This is why you will see the risk warnings on any mortgage you take out, alerting you to the fact that if you fail to keep up with repayments, your house could be repossessed).

The reason a mortgage is often referred to as a “first charge” is because mortgages are usually taken out to buy a property – so this is the first charge that has been registered against that property.

Now, let’s look at secured loans – which, although they are also technically mortgages, are more often referred to as secured loans, “second charges” or sometimes “second charge mortgages” or “second charge loans.”

A secured loan works in exactly the same way as a mortgage – it’s a loan secured against a property. Most people take out a secured loan when they want additional funds and it makes more sense for them to do this while keeping their current mortgage (their “first charge”) in place.

Because of this, the charge put on the property for a secured loan is the second charge that’s been placed. Therefore, it is a “second charge” loan.

The order of the charges matter, because it gives the lender different priorities in the event that the house has to be repossessed and sold to recover any money owed.

The lender who has placed the first charge on the property gets to recover their money first, followed by the lender who has placed the second charge.

You might still be asking, “Why do the order of the charges matter? Won’t both lenders get their money back if the house is sold?” Not necessarily – especially if house prices fall or if the house goes to auction and the sale doesn’t cover the total amount of any mortgages or secured loans outstanding. In this case, the lender with the first charge might recover everything they are owed and the lender with the second charge will have to make do with whatever money remains.

As for homeowner loans, when people refer to these, they’re generally talking about a secured loan. The main thing to remember is that you can only have one if you’re a homeowner.

Secured loans come in several forms, so you need to find the right one for your needs, the main loans types of secured loan are:

  • Mortgage – technically a mortgage is a secured loan, as it’s secured against your property
  • Homeowner loan – this is a standard secured loan, with your property used as collateral
  • Bridging loan – this is when you borrow money to fund the gap between selling your old property and buying a new one. This type of secured loan is usually over a short period of time
  • Debt consolidation loan – this is a specific type of secured loan which you take out to consolidate all your debts

The documentation required varies from person to person and will depend on individual circumstances, usually you’ll need:

  • Proof of identity and address.
  • Proof of income and expenditure.
  • Copy of your credit report.

That will depend on your individual circumstances and what you qualify for, but there are often times when a secured loan is a better option than a re-mortgage, such as:

  • You already have a fantastic rate on your current mortgage, and it’s one that can’t be beaten by a re-mortgage.
  • You’re in the introductory period of your deal or have a fixed rate mortgage which would mean paying early payment charges if you were to re-mortgage. A secured loan allows you to take the further borrowing while leaving your existing mortgage in place, meaning you wouldn’t have to pay any penalty charges.
  • You want to borrow an amount of money that is relatively small (compared to a mortgage) over a relatively shorter period of time (again, compared to your mortgage).

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Representative example: Borrowing of £40,000, plus £595 lender fee, plus £3,000 broker fee, totalling £43,595, over 192 months on a 5-year fixed product with an initial borrowing rate of 9.2%, following a variable rate of 9.6%. There would be 60 monthly instalments of £434.49, following 132 monthly instalments of £442.52. Total amount payable £84,577.09, made up of: Mortgage amount £40,000, Interest £40,887.09, Lender fee £595, Broker fee £3,000, Exit fee £95. Overall cost for comparison purposes 11.4% APRC.