If you are looking to raise funds, whatever the reason, it may be possible to utilise the equity in a property that you own. You don’t have to remortgage in order to do this; you can instead take out a secured loan.
Secured vs unsecured lending
Unsecured lending includes borrowing on credit cards or store cards, and loans that are not secured against a property or other tangible asset. This type of lending is a higher risk for the lender, and so the interest rates charged tend to be higher than on secured loans. The amounts available to borrow tend to be lower – typically between £1,000 and £25,000 – and the term of the loan is generally shorter; between one and five years. If payments towards unsecured borrowing aren’t kept up, then while action will be taken to recoup losses, there is generally no immediate right on the part of the lender to take property in lieu of money owed.
A tangible asset is something that has a value and that could be sold in order to recoup losses in the event that loan payments aren’t maintained. If a business were looking to raise funds, then their tangible assets could include land, property, vehicles or machinery. In the case of a personal secured loan, tangible assets could potentially include jewellery and works of art, plus land or property. The most common asset used to secure a personal loan is property.
Because the loan is secured against a tangible asset – your property – the risk to the lender is reduced. This means they are typically able to charge a lower rate of interest. Loans secured against property tend to be for higher amounts of money – £10,000 to £500,000 – and may be repaid over longer periods of time, typically between five and twenty-five years. This can make the monthly repayments more affordable.
In short, a secured loan will almost always be more affordable in terms of interest rates and monthly repayments. However, you should weigh this up against any perceived risk involved in securing additional debt against your home together with any associated costs to set up the loan. As well as being confident the payments are affordable alongside whatever other financial commitments you have, you would be wise to do a little contingency planning. For example, would you be able to continue meeting your payments if you were to lose your job, have an accident, or become ill?
I’ve already got a mortgage on my property; can I take out a secured loan as well?
A secured loan can be taken out on a property that is also subject to a mortgage, provided there is enough equity in the property to cover the amount of the loan. Also, when working out roughly what you should be able to borrow, bear in mind that lenders will generally limit themselves to an overall loan-to-value (LTV) ratio of 85%.
For example, if your property is valued at £240,000 and the amount left to pay on the mortgage is £140,000, then you have equity of £100,000 in the property. If the lender is operating on a 75% LTV ratio, then the maximum total secured borrowing allowed against the property is £180,000. The mortgage accounts for £140,000, which means you could potentially take out a secured loan for up to £40,000. If you need to borrow more, then there are lenders who work to a higher LTV; a specialist loan adviser would be able to offer assistance.
What are the reasons people take out secured loans?
People borrow money for all sorts of reasons. It could be to make renovations or to pay for home improvements, to raise the deposit needed to buy an additional property, to buy a vehicle, to pay university tuition fees, to start a business venture or to consolidate debt. Secured loan providers may decline to lend money for some specific purposes, such as gambling or stock market investment.
How likely am I to be accepted?
As we’ve established, secured loans are so named because they are secured by a legal charge against the value of your property. This reduces the risk to the lender, which in theory improves the borrower’s chances of being accepted.
Any potential lender will look not only at the value of your home and the available level of equity but also at your personal credit history. Having a less than perfect credit history does not prevent you from applying for a secured loan. In fact, because the loan is secured, you could arguably be more likely to have a better chance of being accepted than you would if you applied for an unsecured loan. Specialist lenders exist that deal in secured loans for those who have had previous problems with debt, including (for example) County Court Judgments (CCJs), defaults and Individual Voluntary Arrangements (IVAs).
However, you should remember that if for any reason you fall behind with the repayments, you may either have to sell your home to raise funds to clear the debt or your home may be repossessed. In other words, the security is in favour of the lender, not the borrower – the money they lend is backed up by a tangible asset. Having said that, secured loans can be a good way to raise funds for some people, not least because they can be more affordable than unsecured loans.