- Secured loan or mortgage?
- How Brexit impacted the secured loans market
- Bad credit? Try a secured loan!
- Real costs of long term borrowing
- Secured homeowner loans options
- What happens if I default?
Secured Homeowner Loans
If you can’t find a personal loan with a reasonable interest rate, you may think of turning to a secured homeowner loan. These are usually cheaper than unsecured loans, but is it worth the risk? Let’s begin by clarifying exactly what a secured loan is.
What is A Secured Loan?
Any loan that under the title of ‘secured’ will allow you to borrow funds secured on your home. This can be comparable to an online logbook loan. With those, you borrow against the value of the car. Should you fail to pay, there is the possibility of the lender taking your car. For these loans, the lender is allowing you to have the money, possibly even with one of his cheap personal loan rates. But, in return, your home is pledged as security against default of the repayments. Secured homeowner loans can be a great way to borrow money with a lower interest rate.
In effect, secured homeowner loans are similar to a mortgage. But, you do not have to go through the same amount of complicated steps. For one, the lender will not request a survey of your property. The lender will, however, apply all the same background credit checks as those that are applied to any other personal loan.
Secured homeowner loans are also known under other names such as home equity loans, homeowner loans, second mortgages, second charge mortgages and quick debt consolidation loans.
What is equity and how is it used in secured homeowner loans?
Equity is the percentage of your property owned outright by you. That is, the value of the home minus any mortgage owed on it.
Consolidating all your current debts into one monthly payment may appear attractive. However, it can be a bad idea. Unsecured loans do not put your home at risk but secured homeowner loans could lead to your home being repossessed. Contact one of the debt charities for free advice and help that will enable you to get back on track.
Brexit and Secured Homeowner Loans
Not everyone can afford to employ a financial advisor. With Brexit on the near horizon now is the time to consider how to secure your family finances in the future. Financial markets will no doubt react strongly with Article 50 and these reactions can cause disruption to interest rates, inflation and total borrowing costs. So, if you are thinking about taking out secured homeowner loans it is worthwhile considering what impact the UK’s new relationship with the EU might have on your own family finances.
The falling value of the pound seems set to increase inflation. This means a rise in prices for food, oil and most household goods. Similarly, increases in the price of oil will affect energy and transport costs. The ordinary UK family will feel the brunt of these increases. With this in mind, it may be a good time to reconsider whether or not to take out a secured homeowners loan or wait until interest rate settle down. This will also depend on what you need the loan for. If you had planned on taking a home improvement loan, you might decide to wait until a better moment in time.
Effects of the EU Referendum on the Secured Loans Market
Just prior to the EU referendum first time buyer lending was up by 25% on the previous year. In July 2016 total house purchase lending was down by 13%.
- Remortgage activity totalled £5.6bn, up 8% on May and 6% compared to a year ago. This came to 32,400 loans, up 4% month-on-month but down 2% compared to a year ago.
- Remortgage lending saw a month-on-month and year-on-year growth in July. £6bn was borrowed in total in the month for remortgage. This, alongside April 2016, is the highest monthly amount borrowed for remortgage since January 2009- source Council of Mortgage Lenders.
So, figures show that second mortgages and secured loans actually increased after the result of the referendum. There are many reasons behind this increase. One possibility is that families were anticipating an increase in rates. So, they decided to go ahead with a secured loan while the interest rates were still low.
Reasons For Borrowing on a Secured Loan
There are numerous reasons why you may want to borrow money in the form of a secured loan, possibly even to obtain cheapest personal loan rates. You may wish to make some home improvements or to purchase a new car. Or, maybe you want to go on the trip of a lifetime. However, most people who take out borrowing on a secured loan use the money as a form of investment. For example, investing in their home by paying for improvements.
It is very unwise to use a secured personal loan for a holiday or for a shopping spree. You may decide to borrow in order to lend your child a helping hand onto the property ladder. However, unless you have a lot of equity already in your home, this is not a recommended action. Whatever the reason, if you fail to keep up with the repayments your home could be at risk.
Secured Loan for Bad Credit
A secured loan is sometimes offered to homeowners who have a minimum of 25% equity in their property. It may be a useful way to borrow for those who are not able to get an unsecured loan due to a poor credit rating.
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If you are refused an unsecured loan due to bad credit you may be able to borrow money against the equity that you own in you home. Lenders are often sympathetic to homeowners who want to consolidate debts. £5,000 does not seem a huge sum of money to borrow. But, you maybe surprised at the amount you have to pay back. So, what does it cost to borrow £5,000 over a 15 year term?
Costs of Borrowing a Homeowner Loan
Borrowing £5,000 at 8.5% APR will mean paying £49.24 per month. But, the total cost of borrowing over 15 years comes to £3,862.66. Fifteen years is a long time to pay what is essentially ‘dead money’. Always look at the total cost of borrowing before entering into an agreement for a secured personal loan.
Although many lenders will offer a secured loan for as little as £3,000, most people will be looking for £10,000+. The nature of the loan means that lenders are less at risk. This is why interest rates for secured loans are usually lower than those for the unsecured type.
Secured Loan Rates of Interest
Searching through one of the money advice websites will give you the latest figures for rates of interest on secured loans. Currently interest rates are low with figures ranging from 3.83% to 9.4%. However, it is important to note that these figures are headline rates. They are not offered to everyone who applies. The rate you will be offered will depend upon personal circumstances and your credit history and score.
Secured Homeowner Loans Affordability
Lenders will only grant personal secured loans if they are confident that you can afford to make the repayments. There is less risk for the lender with this type of loan. However, most will still make sure that you pass the affordability test before offering you a loan. That said, if your credit score is poor but you have a large amount of equity in your home you are more likely to be accepted for a secure loan than unsecured personal loans. Some lenders use affordability calculators to assess each application but these do not always translate into the real world especially if you are self employed.
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Different Types of Secured Loans
Depending on your circumstances, there will be different types of secured homeowner loans available to you.
First and Second Charge Home Loans
A first charge mortgage is exactly what it says it is. There is no current mortgage on your home and you borrow money against the value of the property. A second charge loan (or mortgage) can be set up with the existing mortgage lender. Or, you can go to another lender to borrow. If you are thinking about taking a secured loan to consolidate your debts this can be either a first or second charge loan.
Most lenders who already own the mortgage on your property will consider lending you further funds for home improvements. If you have a considerable amount of equity in your property, you may be able to borrow funds to buy a second home e.g. a holiday home.
Self Employed Secured Loans
If you are looking for direct lender self employed personal loans, then for both unsecured and secured homeowner loans you face a particular set of challenges. The high street lenders are well known for neglecting the self employed. Since self certification loans became prohibited, these banks have tended to leave this sector of customers to the specialist lenders. Some lenders are more flexible and will apply affordability checks on those who have been self employed for a reasonable length of time. But newbies to self employment or those suffering from a turn down of trade can expect difficulties when trying to raise money.
If you have an accountant who can offer projections for the next year or have SA302s, you can get a good rate of interest. And, of course, you are putting up your home as collateral. So, the lender will have less reservations about lending.
Secured Loans on a Jointly Owned Property
In order to get a secured loan on a property that is jointly owned, both owners have to agree and to sign for the loan. There are some unethical lenders who will allow an applicant to borrow against their proportion of the equity in a home without the knowledge of the other owner. This is legal but the contract must state that it is an equity loan and not a secured loan against the home.
If the agreement is for a secured loan then the lender can get a charge on the house. Similarly, it has been known for partners to forge signatures on a loan agreement. If this happens the agreement should be null and void. But, lenders often use their considerable weight to demand repayment.
Repaying a Secured Homeowner Loan
Everyone who takes out secured homeowner loans will always intend to make the repayments. Occasionally, though circumstances overtake the best of intentions and repayments become difficult to meet. This may be due to a loss of employment or a period of long term sickness. Lenders never want to repossess a home and will go to some lengths to avoid this scenario. But, sometimes it can happen that they have no choice unless they want to lose the money that has been borrowed.
What Happens if Payments Are Missed
Once you have reached the point where you are about to default on a secured loan, there are a number of options open to you before you miss a payment. Firstly, contact the lender and explain the financial situation. Most lenders are willing to wait and to try to work out some alternative to repossession. You can go down the route of an Individual Voluntary Arrangement. This is a debt management solution where you pay all your lenders a set amount each month. In return, the lender may stop adding interest or accept a smaller payment each month.
A debt management advisor will set up the arrangement. This is a good way to get some breathing space which will allow you to sort out your finances. Sometimes, problems may only last for a short while. If your lender is happy to wait, you may soon be able to resume normal payments.
Default on Secured Loans
Anyone who is already in default of payments needs to take action very quickly. Debts never go away without some action. There are always consequences (often serious) to missing payments on a secured loan.
Contacting a debt counselling charity for help will mean you are not alone in your situation. If you ignore the problem and the worst comes to the worst, the lender may repossess your home leaving you with nowhere to live. Additionally, if the sale of your home does not cover the amount of your mortgage and the secured loan you could still end up owing money. Furthermore, anyone who experiences this situation will find it difficult if not impossible to borrow money in the future. Luckily, this situation rarely arises and ethical lenders frequently turn down loans where the borrower does not meet the affordability checks.
Making Early Repayments on a Secured Loan
By their very nature, secured loans are designed to be repaid over a longer period of time than unsecured loans. However, if you suddenly find yourself in a situation where you can make an early repayment of the total amount of the loan, it can cause problems.
Some lenders will demand that you pay interest to the original end date of the loan. However, new loans of less than £25,000 attract a maximum early repayment penalty of two months interest. Loans for larger amounts may attract a penalty of up to six months interest. In order to make sure that you do not fall foul of these excessive penalties, it is a good idea to only take out a secured loan as a last resort form of borrowing.
Benefits and Drawbacks of Secured Loans
The first obvious benefit of secured homeowner loans is the interest rate. It will usually be lower than those charged on unsecured personal loans UK. You need to make the payments for secured homeowner loans monthly so you can easily budget and if you have the same lender as that of your mortgage it is easy to set up. The biggest drawback to secured homeowner loans is that it puts your home at risk if you default on the payments. In addition, if the interest rate is variable then payments may go up in line with Bank of England base rates.
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Some second charge loans can be arranged with a fixed rate. But, this may stop after a certain length of time e.g. three or six months. Finally, setting up a second secured loan on your home may involve paying an arrangement fee. This should be included in the quoted APR and in your monthly payment. If the APR offered is substantially higher than other lenders it can be worthwhile shopping around instead of staying with the same lender which has the first mortgage charge.
Secured Homeowner Loans
Securing your loan against your home is a form of borrowing that allows you to borrow funds using your home as a security. There are a range of lenders who offer secured homeowner loans. If you are uncomfortable with the idea of risking your home for a loan, then you should look for an unsecured loan instead. Personalloansnow.co.uk have access to Monevo’s panel of lenders and unique technology that allows them to select a lender most suited to you. We’ll do all we can to find you a lender that can offer the best unsecured personal loan for you. Apply now, even if you have bad credit.