Secured Loans Explained

Secured loans are a useful way to access money without selling your home or disturbing your existing mortgage. They’re a popular option if you need to pay for a big expense, like home renovations or consolidating debt, but don’t want to sacrifice the mortgage deal you currently have in the process.

In our guide, we’ll walk you through what a secured loan is, how it works, and when it might be the right solution for you. We’ll also highlight the alternatives so you can make an informed decision about what’s best for your situation.

What Is a Secured Loan?

A secured loan is a type of home loan that uses the equity in your property as collateral (security) for the money you borrow. The term 'secured' simply means that if you can't keep up with the monthly repayments, the lender has the legal right to take possession of your home to pay off the debt.

Secured loans are also often referred to as:

• Second-charge mortgages (because they sit behind your first mortgage)

Or

• Homeowner loans (a more general term, emphasising that the borrower is also a homeowner)

First Charge vs Second Charge

Your original home loan (your main mortgage) has the 'first charge' on your property. This means that if your home is sold, the main mortgage lender is the first to be repaid from the proceeds. The second-charge mortgage lender is next in line to get their money back, but only after the first mortgage has been cleared.

This doesn't mean a secured loan is a risky choice, but it does mean it’s essential that you’re able to afford the repayments alongside your main mortgage. For a lender, having the property as security reduces the risk involved, which can lead to a better interest rate and a larger borrowing amount than with an unsecured loan.

How Do Secured Loans Work?

Unlike a remortgage with additional borrowing, a secured loan is a separate agreement that sits alongside your existing mortgage, which means you’ll have two separate loan repayments to make each month to two different lenders. 

To get an idea of how much you can borrow with a secured loan, you need to first work out how much equity you have in your home (the difference between the value of your property and the outstanding balance of your first mortgage). 

If your home is worth £300,000 and your outstanding mortgage is £150,000, your equity is £150,000. Your new secured loan will be secured against the available equity up to whatever maximum loan-to-value permitted by your lender. 

For a lender, the amount they are willing to lend depends on a few factors: 

• The loan-to-value (LTV) ratio of your home.

• Your income and outgoings.

• Why you’re borrowing the money.

For example, if you want to borrow an additional £50,000, a lender will look at your new combined mortgage debt (£150,000 + £50,000 = £200,000) and how this compares to your property’s value. In this case, your new LTV would be 67% (200,000/300,000 × 100 = 66.7). 

A lower LTV is always more attractive to a lender as there’s less risk involved for them.

Why Would You Take Out a Secured Loan?

A secured loan can be an attractive option when you need a significant amount of money and want to keep your existing mortgage deal in place. Here are some of the most common reasons people choose a secured loan:

• Home Improvements. Whether you want to add an extension, a new kitchen, or a loft conversion, a secured loan can provide the funds you need to increase your property’s value without having to remortgage or disturb your existing mortgage.

• Debt Consolidation. If you have multiple loans and credit cards, a secured loan can combine them into one single, manageable monthly repayment. Because the loan is secured against your home, it will likely have a lower interest rate than the other unsecured loans, meaning you could save money in the long run.

• Large Purchases. Perhaps you want to buy a new car, a caravan, or even a second home. A secured loan can provide a lump sum to cover a large one-off expense, and the repayments can be spread over a longer period, making the monthly costs more affordable.

• Preserving your existing mortgage. If your current mortgage rate is very low or locked in for some time, you might not want to remortgage (which could end that deal). A secured loan allows you to keep your first mortgage untouched.

What Happens if You Want to Move Home?

Moving home can be a little more complicated with two (or more) mortgage loans secured on your current property, but it’s certainly not impossible. Here’s what typically happens:

• When you sell, both the first and second mortgages must be settled (paid off). The sale proceeds first pay the first charge, then the second.

• Some lenders may allow you to port or transfer the second-charge mortgage to the new property, but this depends on their rules and your financial situation at the time.

• If you can’t transfer it, you’ll need to repay the second-charge loan from the sale or from other funds.

So, before you take a secured loan, it’s wise to check whether its terms allow transfer (porting), and you’re clear about how that might affect your future flexibility.

Do Secured Loans Affect Remortgaging?

Yes, they do. Second-charge loans aren’t a complete block on remortgaging, but they can limit your options.

When you remortgage your first mortgage to a new deal, either with your existing lender or a new one, your secured loan will be viewed as a separate debt that you’ll need to make repayments on. This will affect how a lender assesses your affordability.

Some lenders might offer you a remortgage to borrow more and pay off your secured loan. This would give you just one manageable monthly payment. However, this would obviously increase your overall mortgage debt from what it was when you took out your first mortgage. A higher loan-to-value (LTV) would typically result in a higher interest rate on your new home loan. 

Are Secured Loans a Good Idea?

A secured loan can be an attractive option, but it may not be the perfect fit for everyone. It's always best to weigh up the benefits and drawbacks before making a decision.

Why They’re a Solid Option

• Keeps your existing mortgage deal. This is the main reason people choose a second-charge mortgage, and is a great option if you have a competitive mortgage deal that you want to hold onto.

• Access to a large sum of money. Secured loans can offer access to a larger lump sum than personal loans.

• Flexibility. A secured loan can be used for a variety of purposes, including home improvements and debt consolidation.

• Lower interest rates. Because they’re secured against your home, the interest rate will likely be lower than for an unsecured loan.

• Longer repayment terms. You can stretch the loan out over a longer period, making your monthly repayments more affordable.

What to Think About

• Risk of repossession. A secured loan places a legal charge on your home, meaning it could be at risk if you fail to keep up with repayments.

• Higher interest rate. The interest rate on a secured loan is usually higher than for a first-charge mortgage.

• Separate payments. Two different payments each month can make it slightly trickier logistically to budget and manage. 

• Makes moving or remortgaging more complicated. Secured loans can muddy the water slightly if you’re planning to move in the future or when it’s time to remortgage your first-charge mortgage. 

What Are the Alternatives?

Secured loans are a great way to raise money, but they aren't the only option available. Here are some alternatives you might want to consider:

• Remortgaging to release equity. This is when you replace your existing mortgage with a new, larger one to release a lump sum of money. This can be a great option if your current fixed-rate deal is coming to an end or if you can find a better interest rate that will offset any early repayment charges. It also means you’ll only have one monthly payment to make.

• Further advance. If you want to stay with your current lender, you could ask them for a further advance on your existing mortgage. This is a separate loan with its own interest rate, which will run alongside your existing mortgage. A further advance can be a simpler process, but it may limit the amount you can borrow.

• Unsecured personal loan. If you only need a smaller amount (usually under £25,000) and don’t want to secure the debt against your home, a personal loan can be a good option. Interest rates can be higher than secured loans, but the money is typically repaid over a shorter term.

Why Pick Picnic for Your Secured Loan

Secured loans are a relatively rare mortgage product, with a limited number of lenders offering them. Finding the right deal on your own could be a challenging and time-consuming process. Having an experienced mortgage broker on your side - like us! - makes things much easier and more efficient. 

Our mortgage team will be able to refer you to a third party provider who can help you find the most competitive rates for this type of home loan. They can compare the current secured loan deals available to find the one that’s right for your circumstances, including exclusive offers not generally available elsewhere.