Loans secured on property normally refers to the fact that a notice is filed with the land registry which notifies anyone buying your house or land that a loan needs to be repaid from the proceeds.
If this sound complicated, don’t worry it isn’t. It is exactly the same process used when taking out a mortgage on your home.
A loan secured on property gives the lender greater comfort that the repayments will be maintained as the borrower is putting his or her house/land at risk. Therefore, lenders are more inclined to take greater risks and will consider lending at lower rates, larger amounts or to people who may otherwise find it more difficult to borrow. If you are thinking of debt consolidation loans or loans where you have bad debt, a secured loan may be the only option. Of course you should remember that, whatever you offer as security is at risk if you don’t maintain the repayments on the loan.
Loans can be secured by a first charge (such as a mortgage) which means the lender will have first call on the proceeds of any sale to ensure the mortgage is repaid. Some lenders will also arrange a second or third charge (also known as a secured loan) which is very useful for borrowers not wishing to change their first charge lender.
Second and third charge loans expose the lenders to greater risk so the rates will not normally be as competitive as a first charge loan. However it can often work out cheaper to take a low risk/low rate first charge loan and have a higher risk/higher rate top up second charge loan than take the entire borrowings on a first charge as the total amount could attract higher rates. This is because the lenders will look at the percentage of the value of your property they are lending against. This is known as the “loan to value” or LTV.
As a rule, the higher the LTV, the higher the risk and the higher the rates of interest charged. In the past, there were different regulations which applied to first and second charge lending. The Office of Fair Trading regulated second charges and allowed lenders to have a more common sense approach whereas the FSA issued severe guidance on first charges which allowed for occasions where a loan was available on a second charge basis which the FSA didn’t allow on a first charge.
Today, second charges are regulated by the FCA as well as first charges and from the 21st March 2016 will be bought under the same regulatory regime, in other words a second charge will be treated the same as a first charge in terms of how they are regulated.
Loans secured on property are not limited to your home. Any valuable land or building can be offered as security although the more obscure the property is, the less lenders there are which are willing and geared up to lend.
There are also lenders which will accept other valuable items as security for a loan however these lenders are often effectively acting as pawn brokers.
Examples of different property we can secure loans against include:
Your main home – bricks and mortar
Investment property such as buy to let houses
Land – commercial or agricultural
Offices and commercial buildings
Building plots or developments
Fine art, antiques, jewellery, cars, boats