What’s a secured loan?
A secured loan is known as a second charge mortgage or homeowner loan. It’s attached to your property, giving extra security to your lender. With less risk involved from the lender’s point of view, they may feel more comfortable lending you larger sums of money with lower interest rates.
However, if you don’t maintain your repayments, the lender could force the sale of your property to get their money back. Bear in mind, this is usually only a last resort.
It’s called a ‘second charge’ because your mortgage (first charge) is given priority over it. For instance, in the event of a house sale, your mortgage provider would be the first to get their money back. Then whatever’s left over from the proceeds would go towards clearing the loan. Once they’re both paid in full, any remaining funds would go to you.
When to choose a secured loan
Some people get a secured loan instead of remortgaging. Reasons for this may include:
- Not being eligible for a remortgage
- Facing early repayment charges if you switch too soon
- Already benefiting from a good mortgage deal
Whatever the reason, make sure you check if a homeowner loan is affordable before you go ahead. Remember, loan repayments are due on top of your existing mortgage. You also need to consider the risk involved if you can’t maintain repayments.
Why would you then remortgage?
You might be wondering why anyone would want to remortgage if they’ve already got a secured loan? Perhaps:
- Their mortgage deal has come to an end and they’re free to switch without charge
- To switch to a cheaper interest rate
What to do with your secured loan
When you remortgage, there are two things you can do with your secured loan:
- Remortgage and borrow more to clear the loan
- Remortgage and keep paying the loan separately
Clear the loan
When you remortgage, you could look to borrow more money to pay off your secured loan.
The amount you can borrow depends on your individual circumstances and the lender’s criteria. For example, the lender may look at your income and outgoings, the value of your house and how much equity you have. (Equity relates to how much of your house you own).
If you decide to clear your loan when you remortgage, you’ll only need to make one payment to one lender each month. This makes it easier to budget.
Another benefit is that the interest on your mortgage is likely to be lower than it is on your secured loan.
However, borrowing more often means you’ll be making payments for longer. As a result, you could end up paying more interest overall.
Before you go ahead, you need to be certain that you can afford the monthly repayments. They may be higher than what you’re currently paying.
Keep the loan
You don’t have to pay off your homeowner loan when you remortgage - only when you sell up. You could pay it separately from your new mortgage. This may be the case if you can’t afford to borrow more, for example.
Be aware, some lenders may be less willing to remortgage your property if you have a loan attached to it.
So make sure you find out where the lender stands on this matter - before you apply. This will prevent you from applying for a mortgage that is unsuitable.
Remember, if you keep your loan separate, your lender will take your repayments into account when you apply for a remortgage. This could impact the interest rate you’re offered. Also, your new mortgage provider may charge fees for the extra legal work involved if you have a secured loan. While some providers may cover this, others will charge you for it (around £200-£300). So it’s best to ask the lender about this before you apply.
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Mortgages are secured against your property. This means your home may be at risk if you fall behind with your mortgage repayments.
Note, the more you borrow and the longer your mortgage term, the more interest you'll pay in total.