If you are considering borrowing a substantial amount and plan to use property as collateral, a secured loan may be the most suitable financing option. This guide explains the essentials of how secured loans operate in the UK, including methods for determining your borrowing limit and key information about lenders and interest rates.
What is a secured loan?
A secured loan is a type of borrowing that requires an asset, such as your property, to serve as security (collateral). These loans are often referred to as ‘homeowner loans’ or ‘second charge mortgages,’ though the terms are interchangeable. For most individuals, a secured loan against property is the most common and readily available option.
How do secured loans work?
Using a high-value asset, such as property, as collateral allows lenders to offer substantial borrowing amounts at competitive rates. This is because, in the event of non-repayment, lenders can recover their losses by taking possession of the property used as security, thereby minimising their risk.
For instance, homeowners can borrow against the equity in their property. This is where the term ‘second charge mortgage’ originates. The primary mortgage on the property is referred to as a ‘first charge,’ while a secured loan against the same property is classified as a ‘second charge.’
What can secured loans be used for?
Homeowner loans are versatile and can be utilised for various purposes, including:
- Home improvements: Financing renovations, extensions, loft conversions, constructing outbuildings or office sheds, enhancing energy efficiency, or covering significant repair costs.
- Major purchases: Funding large expenses such as a new car, wedding, dream holiday, or education fees.
- Debt consolidation: Combining high-interest debts into a single payment secured against your property to simplify repayment and potentially reduce overall costs.
- Business investment: Supporting the launch of a new business, expanding an existing enterprise, or investing in another business opportunity.
Full lending criteria
Key considerations for lenders evaluating secured loans
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Asset and equity: To qualify for a secured loan, you must own the property being used as collateral. The loan amount and interest rate depend on the equity available in your property and the sum you wish to borrow.
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Combined loan-to-value (LTV): Lenders review your current LTV ratio, factoring in your primary mortgage and the additional borrowing. Most lenders cap total LTV at around 85%, though some may allow higher limits.
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Loan purpose: Lenders usually inquire about your intended use of the loan. Some specialise in specific purposes, such as home renovations, and may offer better terms or higher LTVs for projects that enhance property value.
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Credit history: Your credit report provides lenders with insights into your financial standing and repayment history. While those with excellent credit often access the best rates, borrowers with poor credit can still secure competitive options through specialist lenders.
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Debt-to-income (DTI) ratio: This metric, calculated by dividing your monthly debt payments (including your mortgage) by your gross monthly income, helps lenders assess affordability. Ideally, a DTI under 40% is preferred.
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Income stability: Consistent and stable income is a key factor for lenders. If you are self-employed or have variable income from bonuses, overtime, or commissions, a specialist lender may be needed to fully consider your earnings.
Other factors, such as your age and the amount you wish to borrow, also influence eligibility. Each lender has unique criteria, so consulting the most suitable lender for your circumstances is essential.
How much can you borrow?
The amount you can borrow with a second charge mortgage primarily depends on the equity you have in your property, rather than solely on your monthly repayment capacity.
While some lenders may allow borrowing up to 100% of your available equity, most set a maximum total loan-to-value (LTV) ratio at 85%. This total LTV includes your current mortgage balance and the additional secured loan.
For example, if your property is valued at £250,000 and your existing mortgage balance is £150,000, you have £100,000 in equity, giving you a current LTV of 60%. If you were to borrow an additional £62,500 with a secured loan, your total borrowing would reach £212,500, increasing your LTV to 85%.
A limited number of lenders may allow borrowing beyond the typical 85% LTV cap, depending on your intended use for the secured loan and other eligibility criteria.
How to get a secured loan against property
Here are some straightforward steps to follow if you want to get a second charge mortgage:
Gather your details: At least three months of payslips and bank statements to demonstrate your earnings and financial activity. Information about your current mortgage, including the outstanding balance, repayment terms, and lender. A copy of your credit history to provide a comprehensive view of your financial health. Details of any existing debts, such as loans or credit card balances. Additionally, it’s important to have a clear and practical plan for how you intend to use the funds, as this can influence the lender’s decision.
Get expert advice: Consulting an expert adviser allows for a thorough review of your existing finances and debt. By assessing your financial situation and goals for the loan, a knowledgeable adviser can provide tailored advice and outline the best available options to help you secure competitive rates for a secured loan.
Apply for a loan: The key advantage of working with a broker is their ability to connect you with niche or specialist lenders that align with your unique circumstances. This ensures that you can maximise your borrowing potential while still securing the most competitive rates for a secured loan.
If you want to speak to one of our experienced brokers who specialises in secured loans, you can get started here with a free, no obligation chat:
Best secured loan lenders in the UK
There isn’t a one-size-fits-all lender for second charge mortgages. The most suitable lender for you will depend on your individual circumstances and financial objectives. Below is a snapshot of some mainstream lenders and their eligibility criteria to give you an idea of your options:
- Halifax: Minimum loan amount: £10,000. Combined mortgage and additional loan must not exceed an 85% LTV. If the LTV exceeds 80%, a new property valuation is required, which you must arrange and pay for.
- Lloyds Bank: You must have had a mortgage with Lloyds for at least six months. Borrowing limit: Up to 85% LTV (or 75% LTV if your mortgage is interest-only). Minimum loan amount: £10,000.
- Nationwide: Maximum borrowing: Up to 90% of your home’s value. LTV caps vary depending on the loan purpose: For repaying unsecured debts: Maximum LTV of 80%. For structural home improvements: Maximum LTV of 90%.
Specialist lenders
If your circumstances are straightforward, a broker may secure a favourable deal with a high street lender. However, many mainstream lenders require you to already have a mortgage with them to qualify for a further advance, which can limit your choices.
For more complex homeowner loan applications, specialist home finance providers may be a better fit. Examples include:
- Castle Trust Bank
- Masthaven
- Norton Home Loans
- United Trust Bank
Specialist lenders often provide more flexible criteria and tailored options, which are ideal for securing the best rates and terms for a second charge mortgage. Typically, these lenders are not your existing mortgage provider, offering more opportunities to meet your unique needs.
Are the rates different to mortgages?
Second charge mortgages typically come with slightly higher interest rates compared to primary mortgages. This is partly because homeowner loans are often for smaller amounts than the original mortgage.
Regardless of your equity level or credit score, working with an experienced broker can significantly improve your chances of securing the best rates. Brokers can connect you with specialist lenders and access exclusive deals not available on the open market.
Alternative types of finance
Your broker can guide you through the most suitable financing options tailored to your specific needs and circumstances. Here are some common alternatives to secured loans:
- Remortgaging
- Equity release
- Personal loan
- Credit card
- Second charge bridging loan
Frequently Asked Questions
It can indeed be easier to obtain a secured loan with bad credit compared to other forms of borrowing, as the use of your property as collateral lowers the risk for lenders. However, lenders vary in their policies regarding different types of adverse credit.
For instance, some lenders may not approve a second charge mortgage if your current mortgage is in arrears. To navigate this, a broker can connect you with a lender specialising in bad credit who is most likely to consider your specific credit circumstances favourably.