If youíre a homeowner itís possible you have thousands of pounds locked up in the value of your home. But if you need to borrow, is taking out a secured loan against your home a sensible idea or something to be avoided at all costs?
If you are looking for a cheap way to borrow money, or need to borrow a substantial sum, using your home as collateral against a loan could seem like an attractive option.
However, should you ever put your home at risk and borrow money secured against the value of your property?
Here’s what your need to consider before making this decision.
There are 2 main ways that you can borrow money against your home; either through a secured loan, or a further advance.
A secured loan is simply a loan that is secured against the value of an asset, usually your property.
When you take out a secured loan you are effectively putting your home forward as a guarantee to the bank that you'll repay the money you've borrowed in full and on time.
A further advance is where you borrow more money alongside your mortgage, but again the additional funds will be secured against the value of your home.
The main drawback of taking out a loan against your home is that you are putting your property at risk.
By offering your home as security you're giving the lender a legal claim to your property should you be unable to repay your borrowing for any reason at a later date.
This means that if you fail to keep to the agree repayment plan, the lender could repossess your property or force the sale of your home in lieu of repayment.
There are perhaps two main benefits of applying for a loan secured against your home, cheaper borrowing and the ability to borrow more money.
Due to current UK legislation the most you can borrow from a personal loan is £25,000.
However, as these rules don’t apply to secured loans you could be able to borrow over the £25,000 limit using a further advance or secured loan.
Whether this is actually possible will largely depend on your credit rating and the amount of equity you have in your property, but if you need to borrow a large amount, a secured loan could be your only option.
However, when borrowing a large amount against your home you need to be extra careful and make sure you can comfortably afford to repay the loan or your home could be repossessed.
Applying for a further advance or secured loan could be cheaper than a standard personal loan, especially if you need a significant amount.
This is simply because the lender has some other source of collateral for the loan, rather than simply your word you’ll repay.
For this reason they may be more likely to offer lower interest rates than available from an unsecured loan, which can sometimes make them a cheaper option – but by no means always.
Carefully compare the difference in costs as the difference between secured and unsecured personal loan rates isn’t as great as it used to be.
You also need to check if you would be end up paying over a longer period via a secured loan, which would again make them less competitive. As with any form of borrowing that you'll pay interest on, you should aim to take the loan over the shortest period you can comfortably afford or you'll end up paying out more in the long run.
If you have a poor credit record and are unable to secure a standard personal loan you may have more success applying for a secured loan.
Again this is simply because this type of loan is viewed as being less risky by the lender, as if you default they could reclaim the outstanding debt from your property.
Although this may sound like an attractive option, if you have had difficulties managing credit in the past you will need to think carefully before putting your property at risk by applying for a secured loan or taking out a further advance on your mortgage.
Additionally if you have a poor credit rating the cost of your borrowing is likely to be high, even if you are securing the loan against your home.
For this reason you need to consider whether borrowing the money at an inflated cost and risk is really worthwhile,or whether you would be better cleaning up your credit record and applying for a cheaper loan at a later date.
As well as the cost, there are a number of other things you need to consider before applying for a secured loan.
As with any borrowing, you need to be confident that you can afford the loan and that you’ll be able to repay on time each month.
However, this is especially important with a secured loan or further advance as your property will be at risk should you be unable to keep up your repayments.
If you are considering increasing your borrowing against your home then you will need to consider if you need to insure your income.
This is simply because you are exposing your home to greater risk by taking out a second loan and increasing the monthly repayments you need to find money to cover.
Consider if you could afford to continue to meet your existing mortgage payments, bills and borrowing costs in addition to repayments on your new loan should your circumstances change or you were to lose your job or source of income.
If you’re unsure whether you’d be able to make your finances stretch it may be worth taking out an income protection insurance policy.
If you decide this is something worth doing it’s vital that you take the time to find a policy that provides you with the cover you need for an affordable cost.
Otherwise you could find that you’ve been paying for a policy you’d never be able to claim on at the worst possible time.
Take a look at our guide Income Protection Insurance: How to Pay Less for Your Policy to find out more about taking out this type of cover, and our Income Protection Insurance comparison table to find cover that suits.
If you are looking at borrowing under £25,000, then a standard personal loan could be a good alternative.
In the same way as a secured loan, most personal loans will fix your interest rate and monthly repayments for the duration of the loan, so you know exactly what you have to pay and how much you are being charged.
The main benefit of an unsecured loan is that there is no link between the loan and your property, making it much harder for a lender to force the sale of your home should you default on the loan.
If you have a reasonable credit history you're also likely to be able to borrow at a cheaper rate than you would should you take out a secured loan (although perhaps not a further advance if you have a low mortgage rate).
However, you will still need to look for the cheapest rate possible and ensure you can afford the loan before signing on the dotted line.
For more help choosing a personal loan read our 9 Top Tips For the Best Deal on a Personal Loan and use our unsecured loan comparison to get the best loan possible.
If you want a more flexible way to borrow then a credit card could be a feasible alternative. They could also give you access to cheaper borrowing if you use a card with a low interest rate, or borrow through a 0% purchase or 0% balance transfer deal.
However, the credit limits on offer via a credit card are likely to be much smaller than would be available through a secured loan, so if you need to borrow a larger amount they may not be the best choice.
For more information read our guide: Should I Get a Credit Card or Loan? for help deciding if a credit card is a feasible.
You can check our our credit card comparison to see whether any of the cards available suit your requirements.
In recent years social lending, where you borrow directly from savers online has become an increasingly popular alternative to traditional high street loans.
Interest rates also tend to be very competitive, as social lending websites have fewer costs associated with their loans.
However, most social lending websites limit their lending to people with a fair to good credit record, so if you are concerned that you have a poor credit record you may need to look elsewhere.
Additionally, even if your credit record is fair you may find that the loan rate you are offered via a social lending site is less attractive than the headline rates set by bank loans.
This is because every lender who meets a social lending site's minimum criteria is then graded based on their credit history.
It it then this grade which is then either used to calculate the interest rate applied to your loan directly, or advertised to members of the community with savings to lend who place bids on you loan proposal - again the lower your credit rating the more expensive the bids.
Take a look at our guide: Social Lending - Is It Worth the Risk? for more information and our social lending sites comparison to compare the options available.
If you decide that a secured loan is best choice for your finances then it is imperative to get the cheapest deal on your borrowing possible.
Look for a secured loan with the lowest possible interest rates to keep the cost of your borrowing to a minimum.
You can compare secured loans side by side using our secured loans comparison table.
Hello if you have taken a guarantee against your home to a business situation and you have paid that loan off and then you apply for a new loan with a bank as a guarantee can they use the 1st one as a guaratnee as well, in other words I would of thought that the 2nd one would override the 1st one. The bank is saying that this is not the case. Please help. Thanks Deborah
I would like to get a loan but put my house up as the hold back.. I need quit a lot of money as it wouldn't do it if it wasn't important, house loans is something i have been thinking about.
Be the first to find out about the hottest bargains, biggest freebies & best deals each week! Terms & Conditions
Copyright © Dot Zinc Limited 2014. All rights reserved.
money.co.uk is a trading name of Dot Zinc Limited, who are authorised and regulated by the Financial Conduct Authority.
FCA Registration Number 415689.