What are secured and second charge loans?
A secured loan is when a loan is granted by a lender and the lender takes a security over the asset or property. If the customer defaults the lender can take legal action against the customer to retrieve their money. These are also know as second charge mortgages, second charge or further charge.
When should you use a secured loan be used?
If you currently have a mortgage in place and mortgaging would mean a Large Early Repayment, you should look at a further advance with your current lender, and then a secured loan or second charge loan with another lender. A further advance should always be investigated firstly as this would tend to be the cheapest option.
Sometimes it is not possible to get a further advance with your current lender for a number of reasons such as lenders appetite, credit scoring, affordability and equity or security on the mortgaged property.
Credit score with your existing lender can sometime be really difficult. This can be for a number of reasons, such as debt consolidation, blips on payments and a number of other reasons.
Secured and Second Charge Loans Affordability and Criteria
With a secured loan a provider will not restrict your borrowing to 5 times your income. A secured loan lender can go up to 10 times your income as the loan is based on affordability and therefore is not restricted to 5 times your income.
With a secure loan the lender is more likely to enable a client to debt consolidate to clear their credit cards, personal loans and general debts. They are less likely to use the income to debt ratio which is more commonly used by high street banks which hinds a customer to enable themselves to clear their expensive unsecured debts.
Also, as there are many providers and schemes with a secured loan you will find that the secured loan is more bespoke. This means that if you have a good credit score, plenty of income and equity you will be getting the best rate possible. There is provider’s that will also look at customers with a chequered credit history, income that does need to be stretched and minimal equity in the mortgaged property.
We are asked by clients whether a secured loan is the best option?
Please remember that secured loans are not suitable or available for everyone. Customers should be more cautious if they have had past difficulties with credit and had previously consolidated debts in the past. They may be bad habits that need to be broken, such as clearing previous credit card debt and loans to then run up the same debts again. If this is you, you are just repeating the same problem and could be taking a great risk if you fall behind on a secured loan, and the last thing you want is for the lender to take your home and leave you with worse credit than before.
However, if you need the opportunity to raise finance for debt consolidation or home improvements a secured loan might be a great option for you. If you have credit cards near their credit limits, by using a secured loan to clear the balances this will help improve your credit score with most lenders as they will see all the commitments paid up and cleared with a new loan paying one payment. This can also take the pressure off your larger monthly payments.
Pros and Cons of a second charge - secured loan
Cons
- The loan is secured on your home, so you could lose your home if you cannot keep up your repayments.
- Some secured loans may have a higher interest rate depending on your circumstances and fees maybe applicable. Make sure you check on any costs relating to your secured loan
- You could be securing previously unsecured debts against your home. This might make it cheaper initially but you may have extended your term.
Pros
- A secured loan is generally cheaper than a personal loan
- You will be able to borrow more than 5 times your income as the second charge lender works on affordability and you may be able to borrow up to 10 times your income.
You can normally have a longer term to pay back your secured loan or second charge mortgage. - Second charge mortgages are generally quick to setup and you could receive the funds quickly.
What next?
Speak to one of our qualified mortgage advisors and find out your options for either a remortgage, further advance or second charge loan. Call today on 01424 712333
