Most of us will have times when we need to consider taking out a loan and will look at options for both unsecured and secured loans. In certain circumstances, however, a secured loan is your only realistic choice. One example would be if you need to borrow a large sum of money, as this represents a higher level of risk to the lender. Other instances where a lender will offer a secured loan over an unsecured loan would be if you have a weaker credit rating or a shorter history of managing credit.
In this article, we will look at those secured loans which are specific to properties with equity attached. We will examine when it is possible to take out a second secured loan, considering why a person might want to do this, and what homeowners need to know before they consider taking out a second secured loan against their home.
A secured loan is basically a loan which is guaranteed by some form of security. This could be any asset which has a clear and defined value attached to it that the lender is prepared to accept in order to mitigate the risk of the loan. Common examples include a house or a car.
If you default on your loan, then your asset may be seized by the lender under the agreements of the credit arrangement to help offset the outstanding sum. This means that if your security has been provided in the form of your house, then your lender can – and likely will – sell your house as a way of recouping as much of the outstanding sum as possible. For this reason, it is very important to understand the features of a secured loan and to be clear about whether it is the right form of borrowing for you and your needs. If in doubt, always obtain independent financial advice from a regulated adviser. You can find advisers on the Financial Conduct Authority site .
A second charge loan is a specialist type of secured loan. It is also called a homeowner loan or a second mortgage. It is available to homeowners that already have a mortgage and equity in their home. These tend to be specialist types of loan that aren’t available widely on the high street and they are usually offered via specialist brokers. The lenders that offer second charge mortgages may be specialist lenders for certain situations. The interest that applies to these loans may be higher than with a traditional first mortgage because they reflect a higher amount of risk, due to the lesser status of the second charge product.
When you take out a second charge loan you will have two mortgages on your home. The second charge loan, or second mortgage, sits below the primary mortgage in priority. This means that the first mortgage, or the primary mortgage, will be repaid before any second charge loan.
With the second charge mortgage or loan, you can use any equity that you have in your property to provide security against a second loan. When we talk about equity, we’re defining the percentage of the property that you own outright once the outstanding first mortgage has been cleared. This value is calculated by ascertaining the market value of your home, less any loan outstanding on it plus those fees that apply to the closure of the mortgage.
The second charge loan works similarly to the first mortgage. When you sell your mortgaged home, you must use the proceeds from the sale to pay off the mortgage. If you have a second charge mortgage, you use any equity remaining from the sale to pay that loan. For some home sellers, there may still be equity left after clearing both the first and second charge mortgages. But for others, the closure of both loans will appropriate all of the funds from the sale. This is why it is vital to think carefully before taking out a second charge loan. You should also make a secured loan comparison before picking a product as there is a range on the market and you may find that a different secured loan has more favourable terms and fulfils your needs better.
Second charge loan brokers offer these on a specialist basis as an alternative to a remortgage. For example, you might choose one if:
1. You are on an interest-only mortgage (which you might have if you possess an alternative savings or investment vehicle lined up to repay the capital)
2. You are on a fixed-rate mortgage which has early repayment charges, and it makes more financial sense to get a competitive second-interest mortgage instead of paying these charges.
Other reasons to consider second charge mortgage over remortgage are:
1. To overcome a diminished credit score, if this has worsened since you took out your original mortgage
2. If your circumstances have changed which might lead you to pay higher interest overall on the entire mortgage
3. If it works out cheaper to take out a second mortgage rather than pay the costs of a full remortgage
How do I know if a second charge loan is right for me?
Second charge loan brokers can help by reviewing your circumstances and establishing whether these products are right for you. The first step is usually to look at your existing mortgage deal to see if there are any high fees attached to early repayment or any exit fees. The best secured loan for you will depend on different variables, particularly the cost of the finance, the terms of the finance and the duration of the deal. There are second charge loan comparison sites which can show you the best possible deals on the markets at the moment and tell you whether you are eligible for each product. A second charge loan calculator will allow you to work out how much interest you would pay on any loan and also gives you the option of factoring in fees so that you can see what the impact is of paying fees up front or rolling them into your loan.
In order to find the best secured loan, it makes sense to use a secured loan comparison site. These will show the latest offers from different lenders on the market and flag up key features such as their rates, maximum lending values, terms and so forth. You may also be able to make a soft check to see whether or not you would be likely to be accepted for the loan, without the soft check making any footprint on your credit rating.
A second charge finance arrangement can be used for a range of purposes beyond remortgaging. For example, it can be used to provide finance for a special event such as a wedding or to fund home improvements. The lender will usually want to know what you are planning to use the funds for.
Second charge loans are usually available for sums of £5,000 to £50,000 although some lenders may be prepared to offer more. The amount that you can borrow is usually related to the amount of equity that is in your property, as well as your credit rating, credit history and overall finances.
There is a standard reflection process of seven days when you take out a second charge loan. This takes place between the point where you receive your mortgage offer (which is binding) and sign the contractual legal charge document. This mandatory seven-day period is there to provide a valuable time for cooling-off and allows you to consider whether the product and the terms under which it is being offered are right for your needs and circumstances.
You cannot take out a second charge product for any sum that exceeds the value of the equity in your home. The value of this equity will be established through a professional valuation process. You will need to provide evidence of your existing mortgage and any other forms of borrowing as part of your application. A soft application may be available through a second charge loans comparison site to see whether you would be likely to be accepted before you apply.
A second charge mortgage or loan allows you to raise finance when you need it – often at short notice – without having to go through a full remortgage which would require you to change your mortgage product or lender. Second charge loan rates change regularly on the broker market, which is the usual route to applying for this kind of specialist loan. A secured loan calculator  can help you to work out how much the loan will cost, and a broker can help you to find the right product according to your needs.
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