Since the introduction of the Mortgage Credit Directive (MCD) on March 21 2016 we have seen an increase in the number of secured loans (otherwise known as second charge mortgages), as it is now a requirement for financial advisors and brokers to inform clients about secured loans when they are presenting loan options.
This growth in interest is actually part of a bigger trend since the Mortgage Market Review (MMR) in April 2014. As lenders became stricter with mortgage lending criteria, including remortgages, advisors often found secured loans to be the answer.
To keep you one step ahead and assist you we wanted to answer some of the questions commonly asked about secured loans.
What is a secured loan or second charge mortgage?
A secured loan (or second charge mortgage) sits behind the first mortgage facility. It will not affect your existing first charge mortgage, which may be on an interest-only basis or a fixed/tracker rate. However, consent may be required from the existing lender. Anyone who owns property could be eligible for a secured loan.
What can a I use a secured loan for?
They can be used for all sorts of purposes, including works on a buy-to-let property, to buy a new buy-to-let property or to buy business premises. They can also help with debt consolidation as overall they may provide a better rate than separate loans. You can even use secured loans to raise money for business purposes such as to pay a tax bill – something you are not permitted to do with some other forms of finance.
What can I secure against?
You can secure the loan against any property you own including a residential property, such as your home, a buy-to-let property or commercial property.
What is the advantage over remortgaging or using an unsecured personal loan to raise money?
For those with interest-only mortgages, or who have particularly good rates, ie fixed or tracker, remortgaging could end up more expensive. A secured loan also has the advantage that you will not have to pay exit fees from the existing mortgage.
Lenders generally only offer unsecured personal loans up to around £35,000 in value, so there is a limited amount you will be able to borrow. Loans secured on property or assets can be of higher value. Loans secured on property can be secured up to 95% of a property’s value, but will vary according to a number of factors including the type of property, loan advance etc. Equally, the loans can be for as little as £3,000. There will be a minimum property value but that will vary from lender to lender.
What is the repayment period for secured loans?
The repayment period can be longer than other types of loans, up to 25-30 years, either on a repayment or interest only basis.
Why are they more popular now?
The MCD meant that to undertake secured loan business, lenders, administrators and brokers have to be authorised by the FCA and hold the correct permissions in the same way that they do for normal mortgages. Previously there was a compulsory consideration period of 16 days which slowed down the process, now the time to completion has been accelerated considerably. This makes them a more convenient loan type if you need quick finance.
How do I know if a secured loan is for me?
Your first step should be to consult a mortgage broker. They will present you with all the available options including secured loans and advise you of the advantages and disadvantages for your particular case. If you would like to know more about how we could help you, please contact us.