Published: 6:53 PM, Apr 14, 2022
Photo by Henry & Co. on Unsplash
When looking to improve a property? With so much house price inflation over the last couple of years many people must be looking to release equity for plans they have for their homes. Extensions, gyms, garages, even kitting out the garden with a swimming pool ready for next summer.
What is a secured loan? Well, if you currently have a mortgage then a secured loan allows you to release the equity that has already been paid off, or crucially, earned through house price inflation.
That means for someone in an average house worth £270K that might have been worth only £230k only 2 years ago. A secured loan would allow them to take out a second mortgage on that £40k without impacting on the first mortgage which will carry on as normal.
Borrowing on the property to improve the property can often be viewed on as a win win for homeowners. The debt amount may increase but the value of the house will also if the improvements are completed with the intention of increasing the property value.
As it stands, around 10 thousand secured loans are taken out each year with the intention of home improvements. With an average loan amount of £40K then these are usually significant development projects.
Secure loans may not always be suitable, you would always have to talk to a trained mortgage advisor, and they may suggest renewing the existing mortgage but there are circumstances where a secured loan is the preferred option. The new mortgage might go above a set LTV and trigger a higher lending charge, secured loans would not incur this.
Also, if the rate on the initial, first charge mortgage was lower than what could be achieved in the current financial climate then the homeowner can keep paying the existing mortgage at the historic rate and make a new loan with the second charge.
Second charge lending is a unique product with a dedicated set of lenders and access is usually made through a broker, but they are trained to advise on all property lending and are also a required to inform you if the product is not suitable and a change of mortgage is preferential.
Rates on secured loans are typically just above mortgage rates, the reason is that the second charge lender takes on a bit more risk. In the event of the home repossessed the first charge lender gets first hands on the money made from reselling the home, that means if the house has fallen in value the second charge lender might not get their money back.
But let us not leave on that down note. Secured loans are one of the most effective ways of freeing up cash from equity in a property and all that is left for a successful project is you imagination.