Interest-only secured loans – Your options and how to get one quickly
A secured, interest-only loan is an option if you own a property but need cash. This is a popular way of paying for large-ticket items like home renovations and holidays. It also allows you to consolidate your debt.
A secured loan is a significant financial commitment. It’s essential to understand the process before you make any decisions entirely.
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What’s in this interest-only secured loan guide?
This guide will help you understand how interest-only secured loans work and what you can borrow. It also explains how to get the best rate from a mortgage broker.
We have a few mortgage providers lending secured and unsecured loans. Even if you have bad credit or no matter what your personal circumstances our mortgage lenders will be able to help.
What is an interest-only secured mortgage?
An interest-only secured loan, also known as an interest-only second charge mortgage, is available to homeowners who have a mortgage but want to free up equity to fund their future.
The lender can repossess the property if the borrower fails to make their payments.
You only have to pay the interest on your loan as with the first charge of interest-free mortgages. The repayment of the borrowed amount will occur at the end of your mortgage term.
Mortgage lenders will require evidence of a payment schedule to approve you for an interest-only mortgage with second charges. This is how you will repay the outstanding mortgage balance. This could include a property sale, inheritance, or cash savings.
You should remember that taking out any of these loans will effectively give you two mortgages to pay.
It is best to talk to a mortgage broker to determine if it’s the right option for you. We provide mortgage advice free of charge. We will ensure to match you with s provider whose lender criteria you meet.
Whether you have an existing mortgage or poor credit history we are here to help.
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Advantages and disadvantages of interest only secured loans
After separating secured and unsecure types of lending, let us now focus on the benefits and disadvantages of interest-only secured loans.
Let’s first clarify what an interest only secured loan is. A secured mortgage with interest only is a financial product that allows borrowing, but the mortgage holder must pay the monthly interest. This is done during a agreed term. The capital amount borrowed will remain unpaid at the end the mortgage term.
The Advantages of Interest-Only Secured Loans
- Lower Repayments – Interest-only mortgage payments are less expensive than standard, repayment mortgages. However, it is important to remember that the capital loan remains due after the term ends. Therefore, a strategy for repaying this will be necessary.
- Secured loans have a longer repayment term – These loans are typically more affordable than unsecured loans, which can be capped at seven-year terms.
- Secured loans have lower interest rates than unsecured loans. This is due to the asset linked to them.
The Disadvantages Of Interest-Only Secured Loans
- Capital remains outstanding – Interest-only lending has one major drawback: the capital must be repaid at its end. Before you can take out a loan, a repayment plan must be established and agreed to with the lender.
- More risky – An exit strategy for interest-only mortgages is required. The repayment vehicle, such as investments or pensions, could act differently to the plan. Therefore, there might not be enough capital to cover the capital.
- Interest-only loans are not as affordable as repayment mortgages. The capital is not reduced over the term so the interest rate will not increase.
Different types of interest-only secured loans
There are three types of main types:
Fixed term
The monthly amount that you pay remains the same throughout the loan term. This might be a good option if you prefer to keep a budget.
Fixed for short-term
For a certain period, your payments will remain the same. This could be for 2 years or 5 years. You then pay your lender’s standard variable interest rate, which can fluctuate depending on market conditions.
Variable rate
The Bank of England base interest rate is the rate at which you will pay your interest. You could spend more if the interest rate goes up. However, a decrease in it could mean that you will pay less. This option allows you to adjust your monthly payments and the amount you repay over time.
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Why would you want interest-only mortgages?
There are many reasons why people take out secured interest-only loans. The most common reason is to finance home renovations, such as loft conversions or extensions. Saving for large projects can take years.
Therefore, releasing equity from their home is faster and easier. This loan can be much cheaper than an unsecured one. You will typically be able to access more competitive rates because the loan is secured against your home.
This equity can finance other costly purchases like weddings, holidays, and cars. It’s also used to consolidate debt. You can use the money from your loan to pay off your other debts, such as credit cards and personal loans. This will allow you only to make one monthly repayment.
Borrowers who wish to lower their monthly payments will find these loans attractive because they are interest-only.
How a broker can help you with an interest-only secured mortgage
You will need to find a lender who specialises in interest-only secured loans. They aren’t widely available. An entire market broker specialising in this field is the best to help you find the best lender for your situation and negotiate the best deal.
They can save you the hassle and cost of lost applications.
They also have access to rates that aren’t available to the public.
Our network includes highly-skilled brokers who are ready to assist you. Contact to arrange for a specialist in interest-only secured loans to contact you.
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What is the maximum amount you can borrow?
Although each lender will have maximum and minimum borrowing limits, most won’t lend less than £10,000 or more than £1m. The amount of money you can borrow will determine how close you meet the eligibility criteria.
Criteria for eligibility
You will need to meet strict criteria to be approved for these loans. While each lender will have its requirements, the following guidelines should be followed.
Equity in your property is essential
Many lenders require that you have at least 50% equity in your home. The limit is usually £100,000. However, it may be higher. Your application will be rejected if you do not have sufficient equity.
Calculating your equity involves subtracting the mortgage amount from the property’s value. If your property is valued at £350,000 and you have £250,000 in mortgage, your equity would be £100,000.
LTV (loan to value) is determined by the equity you have in your property. LTV limits can range from 50% to 80%, but they vary from lender to lender. LTV caps of 70% or higher mean you can only borrow 70% of your equity.
A viable repayment plan
You must repay the entire amount you borrowed at the end of the term. Your lender will request proof of your repayment plan to ensure you can refund the total amount. This could be an inheritance, a lump amount from your pension, the sale of a property, or investment earnings.
You may need to consider remortgaging or selling the property to compensate for the shortfall. If you are over 55, you might also have to view the equity release.
Your credit rating
These loans can be secured, so having poor credit marks shouldn’t affect your approval chances. You will be able to get better deals if you have a good credit record and a track record of repaying debt.
Affordability
While your monthly payments will be lower than if your capital repayment loan was chosen, lenders will still need to ensure you can pay off two loans at once – your first, first-charge mortgage and your second-charge loan interest. This will be done by comparing your income to your expenses.
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Which lenders offer these loans?
These loans are difficult to obtain and can only be obtained through specialist lenders like Shawbrook Bank, United Trust Bank, and Masthaven.
Rates can vary between lenders. The amount you pay depends on many factors, including the term of your loan and your affordability assessment.
Second-charge loans are typically more expensive because the first lender will have priority over you if your payments fall behind. You can expect to pay anywhere from 4% to 9%.
A specialist broker can help you choose the right lender for your situation.
Other options
There are many other options to get cash if an interest-only secured mortgage is unsuitable for you. If you are over 55, you can take out an unsecured personal loan, add credit card debt, or get an equity release.
You could also remortgage. You could remortgage, which would mean switching to a new mortgage deal with either your current lender or a different lender. The lender will also add the cash amount you wish to your loan. This could be an option if you are nearing the end of your current agreement. However, you might have to pay large exit fees if you want to remortgage your home before the term ends.
A broker can help you determine what is best for your situation.
Get connected with an interest-only secured lender specialist
A secured interest-only loan is a complicated financial transaction. It’s best to get advice from an independent specialist broker.
Our network has brokers with proven track records for helping borrowers get these types of loans. Call today to enquire and be matched with an expert for a complimentary initial conversation.
Each advisor in our network is carefully selected and vetted to ensure you get the best advice.
FAQ
How long is the average term for an interest-only secured loan?
The term lengths can vary between 15 and 25 years, sometimes even longer. This is compared to the average 7-year term for an unsecured loan.
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