Secured loans are one of the most popular methods for borrowing money.
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Secured loans are one of the most popular methods for borrowing money, and secured loans against property (also known as homeowner loans) are the most common type of secured loans.
Making the choice to borrow money is a big decision, and there are two big factors that will have to be considered during this decision. Firstly, choosing between a secured loan and an unsecured loan, and if you choose to opt for the secured loan, choosing which collateral to have your loan secured against.
Unsecured loans vs secured loans
Choosing between these two types of loans might not actually be an option available to you, as it is often quite dependent on circumstance. So making sure you know the difference between a secured and unsecured loan is an important place to start your considerations.
Whichever choice you decide on, it’s important to compare loans and shop around to find the best deal and best interest rate before taking it out. Think carefully before securing a loan against something you cannot afford to lose, and if you’re under any doubt make use of a money advice service before making the decision.
What are unsecured loans?
An unsecured loan is a type of personal loan where you are able to borrow money without using any collateral on your end to ‘secure’ it. You will have to pay back the loan in due course as agreed, and certain factors will still play a part in how much you can borrow.
These factors are dependent on the loan provider or lender. Generally though, things that will be taken into consideration include the sum of money you wish to borrow, your own financial history or credit score, and other personal circumstances such as your income and the reason you require the unsecured loan.
Because this type of loan is unsecured, the amount you can borrow will be significantly lower than other loan types, though it is likely that the amount you’ll be required to repay in monthly repayments will not be much different (in terms of percentage) than with a secured loan, though the interest rates might be higher.
An unsecured personal loan will usually be harder to attain despite borrowing less and paying back higher interest because the lender is at higher risk without something of value to secure it against. This is the primary reason that makes secured loans easier to obtain.
What are secured loans?
Secured loans, on the other hand, are a type of loan which is ‘secured’ against collateral put up by the borrower. This means the lender has some form of reassurance that they can seize to pay back the loan if the borrower can no longer pay it back.
Types of collateral that can be used to secure personal loans include money in a savings account, stocks, bonds, jewellery, fine art, future paychecks, cars and homes. Homes are by far the most popular choice for this type of loan, which is why they are often referred to as secured homeowner loans.
The interest rates on unsecured loans are generally lower than unsecured ones because the lender is at less risk of losing their funds. Secured loans tend to be less reliant on external factors like credit rating, financial situation or your own personal circumstances, for the same reason.
One final benefit to opting for a secured loan is that it is often the best route to attain a large sum of money, usually close to the amount that your collateral is worth. The option to be able to borrow more money but with similar monthly payments means that secured loans are often the only choice for big expenditures like home improvements or starting a business.
The obvious downside to choosing a secured loan for raising money is that you risk losing whatever collateral that you put up to secure it.
Secured loans against property
Now we’ve looked at a few reasons, you might be on your way to choosing a secured loan against property (which your lender might refer to as a homeowner loan or even home loans).
We’ve discussed how other loans might have more interest or be harder to get with bad credit, due to the lower risk taken on by the loan company, so a secured loan might be the right option for you. Now we’ll look specifically at securing a loan against property.
Who is eligible to apply for a homeowner secured loan?
Essentially, anyone who is either a homeowner, mortgage payer, or owner of other property is theoretically eligible for this type of secured loan.
It is worth noting at this point that another option to look into could be to remortgage your current mortgage with your existing mortgage lender. These are referred to by some lenders as second charge mortgages. If you do wish to continue to take out a loan, however, you can read into some frequently asked questions below.
How much can I borrow with a loan secured against property?
An important question when taking out a loan is always how much can I borrow? When considering taking out a loan secured against your property, the value of the property will always play a large role in determining the amount you can borrow.
This is relatively similar to the process when taking out a mortgage, in that the mortgage lender will only lend an amount relative to the amount the person is earning, as well as other metrics like good credit history and even other expenses like household bills.
Essentially someone earning average wage will not be able to get a mortgage for a mansion. Similarly, if the property you are using to secure a loan is worth £300k, it’s unlikely you’ll be able to borrow £600k, because then half of the loan is unsecured.
Essentially, the value of the lump sum you will receive in the secured property loan depends on many factors that are specific to you, particularly how much equity you have to put up to secure the loan itself.
It’s worth noting that different lenders might offer different amounts (and different interest rates) for the same value of property, so make sure to compare loans and seek advice from a third party that is not a lender before taking one out.
What is the loan to value ratio?
You might have heard the term Loan to Value Ratio (LVR) thrown about since embarking on your journey to learn about secured and unsecured loans. It’s a financial term often used by the lender to calculate the value of a loan against the value of the asset that is being purchased.
It is a term which is also used in mortgage lending, and is calculated by taking the loan amount and dividing it by the value of the asset being borrowed against. In the case of a secured loan, it will be the amount required in the loan divided by the value of the property that the loan is being secured against, in most cases, your house.
How much is my property worth?
In order to establish how much money you can borrow with a secured loan, you’ll first need to know the value of the property which you wish to secure the loan against.
The most efficient way to get this done is to have your home evaluated. This is when a professional comes to visit the property to value it on its attributes, condition and location, and then compare this to similar properties in the current market.
Once you have had your property officially valued, you can use this information in your application for a secured loan. However it’s worth noting that the bank or lender may ask for a second opinion before proceeding.
When should I borrow money against my property?
Taking out a homeowner loan is really an advisable option when you need to borrow a particularly large amount of money. Typically you will have exhausted other options beforehand like unsecured loans, personal loans, credit cards, or loans secured against other assets that aren’t your property.
If the sum that you need is attainable by securing the loan against something else like a vehicle, valuable belongings or cash savings, it’s generally a better option. Whilst you then risk the other asset being repossessed in the case of defaulting on payments, the vast majority of people would rather lose a vehicle than their home.
Securing the loan against property enables you to borrow larger sums of money for bigger expenditures. Examples of these types of expenditures could be putting down a deposit on another property, for doing building improvements on your existing property, or opening or expanding a business.
These types of investments will all likely return dividends, whereas if you spent the loan money on something like a lavish holiday, you are in no better position than before, but you will have more debts to pay.
It’s not advisable to increase debts without purchasing something of value or increasing the value of an existing asset. Nor is it advisable to take out a secured loan if you have outstanding debt or bad credit for a reason that you cannot remedy.
How to get the best secured loan against your property
If you have read through all of the above information, looked into any other debts that you already have, made sure that your credit score is healthy, spoken with someone who is not a lender for advice, and are still thinking about taking out a secured loan against your property, it’s time to start applying.
Make sure to have all of your information to hand including the property valuation, how much you want to borrow, what it will be used for and the speed at which you can realistically pay it back.
Missing payments won’t mean your house gets repossessed instantly, but there is a very real risk that you can lose the asset used in your secured loan. So make sure that your monthly repayments are achievable and realistic, and that the interest rates are fair.
Shop around for the best interest rates across secured loans, and when you think you’ve read all of the literature and understand the contract in full, read it again to make sure.
It is best to also seek the advice of someone who works with money professionally, like an accountant, to double check that all of the facts and figures add up before making the final decision and taking out a secured loan.
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