If you are a homeowner and the value of your property is significantly higher than your outstanding mortgage, you may be tempted to make use of this equity by taking out a loan against the value of your property.
There are many companies which can assist with such a service and you will find a wide selection of secured loans at Moneysupermarket. It is, however, vitally important to ensure that you understand all the potential implications of such a move before taking out a loan of this type.
The main disadvantage of a secured loan is that should you fail to keep up the repayments, there is a risk of your home being taken away from you and sold in order to repay the debt.
Secured loans typically take longer to arrange than unsecured ones as your property may need to be valued or subjected to a survey. Because of this, the arrangement fee charged by a bank, building society or other financial institution may be far larger than in the case of an unsecured loan.
As with all loans, affordability is the key. Not only do you have to make repayments on the loan, but you also have to continue to make repayments on your mortgage. When considering how much you want to borrow, make sure you allow enough breathing room in your finances to allow for a potential increase in the mortgage interest rate.
Although an unsecured loan is usually a better first option, there may be times when you have no choice but to take out a secured loan. Under current legislation, unsecured personal loans are limited to a maximum of £25,000, so if you need to borrow more than this you would need to able to offer some form of security. The actual amount you can borrow will depend on your income, your credit rating and the amount of equity available in your home.
You may wish to borrow a large sum in order to carry out a renovation or add an extension to your property. If doing so ultimately adds to the value of your home and therefore increases the amount of equity, this may be a worthwhile move.
If you have a poor credit rating or have had major financial difficulties in the past, you may find it much easier to obtain a secured loan than an unsecured one. Securing a loan against your property means the lender is taking much less of a risk in the event of a default. This usually means that they will be willing to lend much larger sums and allow you to pay them back over a longer period of time.
The availability of these lengthy repayment terms – up to 25 years in some cases – means many homeowners decide to use this type of loan to consolidate credit-card debts and other loans on which the interest rates are far higher. Doing so can significantly reduce your monthly repayments but paying back over a longer term will, however, increase the overall amount of interest you have to pay.