What makes a secured loan different to a mortgage?
Mortgages and secured loans – they’re both a type of secured borrowing, so what makes them different?
Well, first let’s look at what makes them similar.
Both a mortgage and a secured loan are secured against your home. This provides a safety net for the lender because if you stop making your repayments, they have the right to repossess your property to get back the money they’re owed.
Mortgages and secured loans are also designed to let you borrow more money over a longer term than with an unsecured loan. Paying back the money over a longer period helps make the repayments more manageable.
The interest rate is also likely to be lower as the loan is secured to your home. But of course, as you’re making payments for longer, you could pay more interest in total.
Another key similarity is that the application process can be a lot longer when remortgaging or taking out a secured loan than when you apply for unsecured credit – as can the wait for the funds to be released. This is not only because you’re probably borrowing a large sum of money, but also because it’s secured to your home.
Lenders take care to check that you’ll be able to afford your repayments on a mortgage or secured loan. If you stop paying, the roof over your head is at risk, and repossession isn’t something that anyone wants to happen if it can be avoided.
"Your lender will carry out a mortgage valuation to make sure you aren’t paying more for the property than it’s worth."
When you chose to become a homeowner, you’ll most likely have taken out a mortgage to buy your home. This is not something you can do with a secured loan – mortgages are specifically designed to loan you the cash you need to buy a property.
Your mortgage is secured to your home and takes priority over any other type of secured lending you take out. So, if you do get a secured loan, your mortgage would be prioritised. In the event that your home is repossessed, the mortgage lender would get back what they’re owed first and what’s owed to the secured loan provider would come out of what’s left.
A mortgage is secured against the value of your property at the time you took it out. Your lender will carry out a mortgage valuation to make sure you aren’t paying more for the property than it’s worth.
If, once you have your mortgage, you want to increase it to borrow more money, this is known as remortgaging (more on that later). Your other option is to take out a secured loan.
"With a secured loan, you can borrow more money on top of your existing mortgage."
Unlike mortgages, a secured loan takes second priority in the event the lender needs to reclaim what you owe them because you’ve stopped paying. Sometimes known as second-charge mortgages, these loans are repaid once the original mortgage has been cleared by the proceeds of the property sale.
Secured loans are secured against the equity in your property. This is what’s left once the amount you have outstanding on your mortgage is subtracted from the current market value of your property. Typically, the more equity you have, the more you can borrow and the better rate of interest you’ll get.
With a secured loan, you can borrow more money on top of your existing mortgage. So, if you wanted to carry out a large home improvement project, like building an extension for example, you could borrow the money you need for this and secure it against the equity in your home.
To borrow more money using a mortgage is known as remortgaging. This means switching from your current mortgage to a new deal that lets you borrow whatever’s outstanding on your mortgage plus the extra money you want.
Whether you choose to remortgage or apply for a secured loan depends on your unique situation and preferences.
If you’re currently in the middle of a mortgage deal and you want to remortgage early, there could be an early repayment charge to do so. This can be very pricey, and in this case, it may be better either to wait until the end of your deal or to take out a secured loan.
If you do this, you can then either remortgage at a later date and extend this by enough to clear your secured loan, or keep your secured loan and simply switch to a new mortgage deal for the same amount as your current mortgage.
But whatever you do, you need to think very carefully before you act. As we said, whether you remortgage or take out a secured loan, the money is secured to your home so if you fail to pay, your property is at risk of repossession.
Regardless of which lender is prioritised, they will both be paid ahead of you from the proceeds of the sale. Always think carefully about whether you can afford the repayments on your new borrowing so your home is not put at risk.
Disclaimer: All information and links are correct at the time of publishing.