Secured loans

What is a secured loan?

Also known as homeowner loans – offer a way to borrow larger sums of money (usually £10,000 +) by using the collateral equity of your home as security against your repayments.

These are usually used when a further advance from your existing lender is not available or you do not meet your current lenders criteria or credit score.

What to consider when taking out a secured loan

Before taking out a secured loan it’s important to assess how affordable the loan repayments will be. The consequences of not keeping up with repayments can vary, depending on how far behind you become, and could impact your credit score, and most importantly, the ownership of your home.

Not all secured loan offers are the same and your personal circumstances will determine the terms of your loan. Here are some of the factors lenders take into consideration when looking at your loan application:

  • Your income
  • Your credit score
  • Existing credit commitments
  • The amount of equity available in your property.

The interest rate you are offered can vary depending on your credit score and your property could be repossessed if you fail to make your repayments.

Alternatives to a secured loan

An unsecured personal loan offering the chance to borrow up to £15,000 over five years, for example, is a popular alternative to a homeowner loan. Not only does this option avoid putting your home at risk, it may also come with even lower interest rates – if you can limit your borrowing to £15,000 and qualify for the market-leading deals.

However, borrowing more than £15,000 is more difficult – and often more expensive – via an unsecured personal loan.

The only real alternative for larger borrowers is therefore to look into remortgaging to free up some cash. Mortgage rates for those with a large deposit – or in other words a lot of equity – currently start at less than 2%.

But the downsides include potentially high upfront fees and the fact that remortgaging means paying interest for longer on the whole amount owed.

Bridging loans

What is a bridging loan?

Bridging loans are a short-term funding option. They are used to ‘bridge’ a gap between a debt coming due – and we’re talking primarily about property transactions, here – and the main line of credit becoming available. Or they can simply act as a short-term loan in pressing circumstances.

They can be invaluable in facilitating a property purchase that otherwise would not be possible. But as you might expect with a stop-gap measure, they can be significantly more expensive than a ‘normal’ loan.

How do they work?

Bridging loans are designed to help people complete the purchase of a property before selling their existing home by offering them short-term access to money at a high-rate of interest.

As well as helping home-movers when there is a gap between the sale and completion dates in a chain, this type of loan can also help someone planning to sell-on quickly after renovating a home, or help someone buying at auction.

As banks and building societies have grown more reluctant to lend in the wake of the financial crisis, there has been an influx of bridging lenders into the market.

However, rates can be high and there can be hefty administration fees on top. Indeed, potential borrowers are warned there is a risk of getting ripped off unless you proceed extremely carefully.

If you take out a bridging loan, you could face costs of up to 1.5% a month – meaning 18% a year.

Bridging loans are designed to help people complete the purchase of a property before selling their existing home by offering them short-term access to money at a high-rate of interest.

Who are bridging loans aimed at?

Generally speaking, bridging loans are aimed at landlords and amateur property developers, including those purchasing at auction where a mortgage is needed quickly.

They may also be offered to wealthy or asset-rich borrowers who want straightforward lending on residential properties.

When should you use bridging loans?

Bridging loans can be used for a variety of reasons, including property investment, buy-to-let and development.

However, more recently, there has been a growing trend among borrowers to use bridging loans because high street and private banks are taking longer to process applications for larger home loans.

Some borrowers are also viewing bridging loans as a simple alternative to mainstream lending.

While a bridging loan may sound tempting, if you’re thinking about taking one out, you need to think carefully about your exit strategy. This might, for example, involve getting a mainstream mortgage or a buy-to-let mortgage, or selling the property altogether.

The problem is, you may not have any guarantee of being accepted for a mortgage with a mainstream lender after having taken out a bridging loan. This could put you at risk of losing your home.

The Financial Conduct Authority is concerned that advisers could be recommending this type of loan too quickly when it may not be the best solution.

Crucially, if you’ve not used this type of finance before you need to tread carefully, as there are often hidden and hefty legal fees and additional administration fees that are not always made clear.

All of these mean the cost of your bridging loan could soon mount up.

Put simply, bridging loans should not be viewed as an alternative to mainstream lending.