Financing home improvements with secured loans

What is a secured loan?

A secured loan is a specialist type of loan which is only available to homeowners. It allows you to use your property as collateral against a substantial loan which is then used to make repairs or improvements to said property.

A secured loan can also be referred to as a homeowner loan, second-charge mortgage or home equity loan. Regardless of the terminology used, in simple terms, you offer the lender your home (or other high value asset) as security to reduce their risk in lending you the money that you need to do the jobs you need or want to do on your property.

Because a secured loan involves using your property as collateral, your property is at risk of repossession should you fail to keep up with repayments.

What are the advantages of a secured loan?

Secured loans tend to be for larger values than unsecured personal loans. Generally, the minimum you will be able to borrow with a secured loan will be £5,000 but because you will be using your home as collateral against the loan, you may be able to access up to £250,000 to carry out repairs and improvements.

Secured loans generally offer longer terms than unsecured loans, usually from a minimum of 3 years up to a maximum of 30 years. Because secured loans generally have longer terms than unsecured loans, the interest rates tend to be lower.

If you have a poor credit history, you are more likely to be accepted for a secured loan than for an unsecured personal loan because the lender is taking less of a risk due to the fact that they will have your home as collateral against the loan.

Provided that your credit score is fair or better, you’re more likely to be able to borrow a larger sum at a lower rate if you take out a secured loan.

What can I use a secured loan for?

The most common reason that people look to take out a secured loan is to undertake work on their property which will either help them to make the most of it, undertake essential repairs to it or increase its value.

The most common home improvements [1] include kitchen and bathroom refurbishments, upgrading heating and plumbing systems, house extensions including loft and basement conversions, adding a conservatory, garden landscaping and full property redecoration. These home improvements can make a property more appealing to future potential buyers, as well as improving the current owners’ enjoyment of the property but they can come at a high price.

When applying for a secured loan, it is important to tell the lender what you will be using the money for as this will be taken into consideration, together with a number of other factors which will aid the lender in determining whether or not to approve a loan, as well as the value and term of the loan and the interest rate that you will be charged.

How much can I borrow with a secured loan?

The amount that you are able to borrow on a secured loan will vary based on the amount of equity you have in the property you wish to borrow against. Equity is defined as the value of the outstanding mortgage you have subtracted from the property’s market value. For example, if your property is worth £175,000 and you have a balance of £125,000 outstanding on the mortgage, your equity in the property is £50,000. Generally the greater your level of equity, the more likely you are to be offered attractive rates as you will be considered a lower risk by the lender.

To determine how much the lender is willing to offer you on a secured loan, they will consider your debt-to-income ratio which includes any regular outgoing payments compared to your monthly income as well as your credit score. Again, the better your credit score, the more likely you are to access favourable offers. This is because people with a good credit history are considered to be less of a risk.

How do I go about getting a secured loan?

Prior to applying for a loan, you should check your credit history. It is useful to have an understanding as to how lenders may see you and it is free to do so [2]. Even small errors on your credit report can affect the deals that you are eligible for so to improve your chances of being accepted at the most favourable rates, it is highly recommended to check and correct any errors before making a loan application.

You would be wise to decide exactly what renovations you wish to undertake and how much they will cost, as well as whether they represent a worthwhile expenditure before taking out a secured loan. Research all of the costs thoroughly and seek firm quotes from suppliers and tradespeople where possible. If you plan to use a secured loan to increase the value of your home, you will need to do your research carefully to understand the property market in your area, general trends in house prices and to assess how much value the improvements are likely to add to your property.

Work out what you can afford by reviewing your income, spending, savings and other financial commitments to determine how much disposable income is left to spend on monthly repayments for the full length of the loan term. When taking out a substantial loan, it is worth considering how you would pay it should your financial situation change. It may be worth considering taking out an insurance policy to protect you – if you decide to do this, ensure that the cost of this policy is included in your budget.

Once you’ve determined how much you need to borrow and how much you can afford to repay each month, you will need to find a suitable loan. FreePriceCompare’s comparator will compare loans across the market as well as carrying out a ‘soft credit search’ to show you which deals you are most likely to get accepted for without impacting on your credit rating.

Once you have compared the market and chosen your preferred deal, the process for getting a secured loan is similar to that of a mortgage application.

Although each lender has its own eligibility criteria, they will all ask for your identity details and your employment history. You will need to declare your current income as well as details of your outgoings and any existing debts. You will also need to tell the lender what you intend to spend the money on. Most have upper and lower age limits and will require you to be resident in the UK. Having a stable address history will help you to be approved for a loan.

If you own the property jointly with someone else, you will be required to make a joint application as both of you will be equally responsible for repaying the loan in accordance with the agreed terms.

If you are self-employed, you will need to provide proof of your income, business bank statements and potentially up to three years of business accounts.

As part of the application process, the lender will carry out a credit check which will help them to determine how much to lend and on what terms. This enables the lender to check that you are able to repay the loan and as your home can be repossessed should you fail to pay, it is vital to be accurate and honest in the application process.

What interest rates will I pay for a secured loan?

The main factors that influence the interest rates offered by secured loan providers are the amount you wish to borrow, the amount of equity in your home, the loan to value ratio, the term you are seeking, your credit history and the current Bank of England interest rate.

Interest rates can vary considerably between lenders, with typical secured loan interest rates ranging from 3% to 20%. As with a mortgage, you may be offered the choice between a fixed rate or variable rate for your secured loan. Some fixed rates are only fixed for a short period whereas others are fixed for the duration of the loan. If you choose a fixed rate secured loan, it can help you to budget as your repayments will not change.

With a variable interest rate secured loan, the interest rate may change during the term of the loan. This means that your repayments could increase or decrease based upon external factors as well as the overall amount payable. In the worst case, there is a risk that you may be unable to afford the repayments and lose your home.

What are the risks of a secured loan?

The greatest risk associated with a secured loan is that of having your property repossessed should you find yourself unable to keep up the repayments. Missing payments could also lead to the lender taking court action against you, imposing county court judgements (CCJs) and negatively impacting your credit score.

It is also possible that the home improvements you carry out may not translate into increased value when you come to sell the property in which case you may have given yourself additional debt for no additional financial benefit.

It is worth noting that secured loans are not covered by the Consumer Credit Act 1974 [3]. This means that once you have signed the legal documentation and sent it to the lender, you don’t have the right to withdraw. Depending on the terms and conditions of the loan that you have taken out, you may be able to repay the loan earlier than planned, but this will frequently incur interest and an early repayment charge which could be as much as 5% of the amount you owe.

How long will it take for me to take a secured loan out?

It will generally take longer to access funds with a secured loan than with an unsecured personal loan, but in most cases, the funds will be available to you within 20 days of your application. This process depends on your circumstances and the lender you have chosen and it is wise to discuss this with the lender if you need the money quickly, for example, if you need to confirm a booking with a tradesperson.

What are the key things I need to remember?

With a secured loan, your home is at risk should you fail to keep up repayments, so always ensure that your repayments are made on time and in full each month – this may mean setting up a direct debit to make the payments automatically.

Manage your spending and do everything you can to stick to your home improvements budget. Review your outgoings regularly, making changes where necessary to ensure that your secured loan repayments remain affordable.

In order to protect or even improve your credit score, it is important that you manage your loan responsibly.