Should I Fund Home Improvements with a Second Charge Secured Loan?
Homeowners planning major alterations or improvements to their properties have a variety of funding options to choose from. One of which is a second charge secured loan which is effectively a second mortgage secured against your property and usually for a smaller sum than the first charge.
Remortgaging which is applying for a loan with a higher loan-to-value (LTV) to release equity has traditionally been an option, although for many this is not the most cost-effective solution.
Usually provided by a specialist lender with the help of an independent broker, a second charge secured loan has the potential to be a far more flexible and cost-effective option.
What is a Second Charge Secured Loan?
The term ‘secured loan’ applies to any loan issued on the basis of security. Most secured loans are secured against the applicant’s home, though other assets of value may be accepted by highly specialized lenders.
Second charge secured loans are typically available in sums of £20,000 or more and are secured when a first charge mortgage is already in place. Credit checks and financial status assessments can be more relaxed than with a personal loan, as the balance of the loan is effectively ‘insured’ by the security provided.
If the borrower fails to repay the secured second charge loan as agreed, the lender is entitled to take ownership of their property in the same way as they would if a first charge mortgage were not paid on time.
What Are the Best Second Charge Secured Loan Rates?
Interest rates on second charge secured loans vary significantly from one product and lender to the next. On a typical second charge secured loan the APR could be set at between 3% to 5% per annum.
With a short-term second charge bridging loan, monthly interest can be as low as 0.5% or less or approximately 6% per annum.
Comparing the market in its entirety with the help of an independent broker holds the key to accessing the best secured loan rates available. The amount you need to borrow and how quickly you intend to repay it will have a major impact on overall borrowing costs.
How Much Can I Borrow with a Second Charge Secured Loan?
Maximum loan size is based primarily on how much equity you have tied up in your property. If you own your home and it has a market value of £300,000, you will be able to borrow close to this amount. If you have a mortgage of £200,000 in theory, you may be able to borrow £100,000 on a secured loan.
The more you need to borrow, the greater the extent to which your financial circumstances will be checked. Working with an independent broker is essential to ensure you find a better deal to suit your needs and your budget.
What Are the Benefits and Risks of Secured Loans?
The main benefits of secured loans are simplicity and affordability. A typical secured loan will not only attach lower rates of interest than a comparable personal loan but can also be arranged and accessed much quicker than a typical mortgage.
You can also borrow much more with a secured loan, in accordance with the value of your home. Poor credit applicants can be accepted by many specialist lenders, as are the self-employed and those with a history of bankruptcy.
Additionally, arranging a second charge secured loan may work out cheaper than a full remortgage.
The downside to a secured loan is the risk of forfeiting your assets in the event of non-repayment. In the vast majority of instances, though, lenders will do all they can to prevent this from becoming necessary. All potential risks and key factors to consider will be disclosed by your broker during your initial consultation.