Can you get loans secured on property, and if so, what are your options?
We answer this question and related queries on secured loans. Before you start to compare loans or apply for a secured loan, you’re going to want to hear this first!
What is a secured loan?
Secured loans are loans that make it easier for the lender to recover the money if the borrower stops paying. This could occur for many reasons, including loss of employment or other debt arrears. The reason that it is easier to get the money back is the individual uses an asset as collateral in the loan agreement, and this asset can be seized and sold by the lender after multiple payment defaults.
The opposite of a secured loan is an unsecured loan, which does not list assets as security. If you decide to compare secured loans in the UK – or any other loan for that matter – only consider loans with companies that are authorised and regulated by the Financial Conduct Authority (FCA).
How does a secured loan work?
There are different types of secured loans, but most of them provide the borrower with a lump sum amount. This is then paid back along with interest through monthly repayments over a pre-agreed duration. You can pay off the loan early in most cases, but to do so you’ll probably have to pay an early repayment charge.
Taking out a secured loan is a risk, and if you cannot keep up with your monthly repayments your asset used as security will be repossessed and sold. This doesn’t happen after one missed payment and is the last resort. The money goes towards the principal loan amount, interest and any late charges applied. If you stick to your agreement your asset will never be seized.
The benefits of secured loans
There are two main benefits of using a secured loan over an unsecured loan. These are:
- You could borrow more – most unsecured loans allow you to borrow up to £25,000. However, secured loans may allow some people to borrow much more than this, especially loans secured on property and home equity which are discussed in detail later.
- Competitive interest rates – secured loans may offer competitive interest rates that are lower than those offered on unsecured loans. Yet, this does depend on personal circumstances and your credit score.
Both of these benefits come about due to the asset used as collateral which reduces your lending risk. They can borrow more and cheaper due to the comparative ease of recovering arrears.
Of course, secured loans come with drawbacks too. The most obvious one is that the asset you use as security in the loan agreement is at risk. Although assets can also be seized and sold after court action on an unpaid unsecured loan. A secured loan may include additional fees, such as appraisal costs and closing costs. Factor these into any loan comparisons you make and don’t focus entirely on the interest rate offered.
Are secured loans easier to get?
When you secure a loan with an asset you make it easier for the lender to recover the money if you cannot meet monthly repayment – in contrast to unsecured loans. You are seen as less of a lending risk with an asset on the line within the agreement. This is why it is generally considered easier to get a secured loan over an unsecured loan.
Yet, any secured loan application will still be subject to affordability checks and a credit score assessment. If the loan you’re asking for is considered unaffordable to you or you have a bad credit history, you can still be rejected for the loan.
Can I use property to secure a loan?
You can secure a loan with a property or with home equity. In either case, your home may be repossessed if you don’t keep up repayments. Using property to secure a loan is quite common and often done so the homeowner(s) can fund home improvements or consolidate existing debts on credit cards and personal loans. However, most loans secured on a property can be used for any purpose.
What does loan secured by property mean?
A loan secured with property is a loan that uses either the property or home equity as collateral in the credit agreement. You can lose your home if you fail to repay the loan.
Securing the loan against a property is using the actual bricks-and-mortar as security, such as a first charge mortgage. The mortgage provider can repossess the home if you do not keep up with monthly payments on your mortgage. Whereas securing the loan against home equity is using the value of your home you own outright. The property can also be repossessed for the creditor to recover this amount of money. We explain more in the paragraphs below.
Note: to work out the equity in your home you need to subtract your existing mortgage from the market value for your home.
Most people who use home equity to get a secured loan do so with an existing mortgage. If the home does need to be repossessed to recover a home equity loan debt, things get a little more complicated.
Once the property is sold and money is raised, the mortgage lender gets priority over the money to pay off the mortgage debt. The remaining money is used to pay off the loan which was secured against the home equity. If the property value stayed the same or increased, this won’t cause issues and there might even be money left over that is given to the debtor.
But if the property had decreased in value and the homeowner was in negative equity, they may not be able to pay off both the remaining mortgage debt and the home equity secured loan debt. The shortfall can be so great that they end up with significant debts and may even need to file for bankruptcy.
This is why you should think carefully before securing any other debts against your home.
What is the interest rate on secured property loans?
Each lender will offer its own interest rates on secured loans, and the rate you are offered will be based on the loan amount, how long you want to pay it back, personal fiannces and your credit score.
The best rates on secured property loans are between 2% and 10%. The rate might be a fixed rate or a variable rate. The former is when the interest stays the same throughout the whole of the repayment period, and the latter is when the rate changes due to the economy or the Bank of England’s base rate – or a combination of both.
How do you secure a loan against property?
To get a loan secured on property you must choose a secured loan that allows you to do so. There are generic secured loans that enable you to use property or property equity as security, and there are specific secured loans that allow this for certain purposes.
You can read about these various types of loans below.
Which loan is secured on a property?
Lots of loans are secured with property, such as mortgages, second charge mortgages, homeowner loans and much more. We discuss seven types of loan that can be secured with property below:
- First charge mortgage
A first charge mortgage is a long-winded way of saying a residential mortgage. It is the first mortgage you take out to buy a property. If you buy a second property using a new residential mortgage, this is also a first charge mortgage. It provides you with a loan to help buy the property on top of your deposit. If you don’t maintain repayments the property can be repossessed and sold to clear the first charge mortgage.
- Second mortgage
Second charge mortgages are second mortgages taken out on a property that already has a first charge mortgage. These loans are secured against the value of the property you already own, also known as your home equity. If you cannot repay the loan the lender can get their money back from your equity, which means a) seizing the property, b) selling it, c) letting the first mortgage lender get their money back first and d) then recovering your debt from the remaining money.
- Homeowner loan
Homeowner loans are also known as home equity loans. They work in an identical way to a second charge mortgage by borrowing against home equity.
- Home equity line of credit (HELOC)
A HELOC is the same as the previous two types of secured loans with two key differences. The first is that the loan is not paid out a single amount. The borrower draws from the loan amount over a fixed period and during this time only pays interest on the loan. After the draw period ceases, the borrower starts to pay back the principal loan amount as well as an interest rate. HELOCs typically charge a variable rate while other secured loans charge fixed rates.
- Home improvement loan
These personal loans can be secured or unsecured. They provide credit for the purpose of renovating or improving your home. It can be wise to borrow against home equity to enhance your home because this can increase its value, and in turn, increase your amount of home equity again.
- Debt consolidation loan
Debt consolidation loans are used to pay off existing debts and merge all the money owed into this loan. You can secure the loan with home equity but you can find them as unsecured loans too. They can’t be used for other purposes, in whole or in part.
- Generic secured personal loan
This type of loan can be secured with different types of assets but is frequently done so with property or property equity. You can use the lump sum provided for any purpose.
Am I eligible for a loan against property?
Getting approved for a secured loan that uses a property as collateral will involve all of the usual checks, including an affordability assessment and a credit score check. Each lender applies their own tests and comes to an independent determination, meaning it is not possible to say if someone definitely will or definitely won’t be approved.
But before you get to this stage, you’ll need to meet the lender’s eligibility criteria on the secured homeowner loan etc. This generally means being of a certain age – either 18+ or 21+ – and being a resident of the UK for six months of the year, i.e., a UK tax resident. But equally, you’ll need to have sufficient home equity in a property you own to apply.
Secured loans on a property may require you to take out a minimum loan amount, and you’ll need even more home equity than this because borrowing against all your equity is not possible. Most lenders will allow you to borrow against 80% (LTV ratio) of your equity at most. Poor credit history or a low credit score could reduce the available LTV ratio.
What credit score do I need for a secured loan?
Your credit rating is looked at when you apply for any secured loan. If your credit score is below average due to previous debt problems and payment defaults, you will either be offered a higher interest rate because you are deemed a greater lending risk, or you will be denied the personal loan.
To get approved with the best rates on offer, you need to have a good or excellent credit score, which is a different number depending on what credit reference agency you refer to. But due to each lender applying independent tests, there is no exact credit score that works as the benchmark to be approved. The Financial Conduct Authority allows each lender to do their own assessments but must follow guidelines as part of responsible lending.
Your whole application and finances are taken into account together.
Alternatives to loans secured on property
Secured loans can be secured with other assets. The most common asset to secure a loan aside from property and home equity is a vehicle. You can use your car to secure a loan, or you can even get a car loan to buy a new car with the car working as collateral if you do not repay, also known as car finance.
If you do not feel comfortable with the thought of risking an asset and losing your home, there are other ways to fund home improvements, consolidate debts and so on. You may want to borrow through:
- Unsecured personal loans
- Credit cards
- Unsecured debt consolidation loans
- Unsecured home improvement loans
- Guarantor loans
- Equity release – not exactly the same as borrowing against the equity
A credit broker can help compare loans and more.
More guides on loans secured on property
This guide has provided a detailed overview of loans secured on property. For further information on any type of loan or secured loan, visit MoneyNerd again soon. We have plenty more secured loan guides and tips to share – and they’re all available on our site for free!