Gareth Broome, BDM at The Lending Wizard, takes a look at why your clients might consider taking out a secured loan and what they can be used for.
A common question mortgage brokers hear is: “Why shouldn’t my client apply for a further advance rather than a secured loan?”
Casting aside the obvious limitations on further advances, and the stricter eligibility requirements, a more indepth look at the varied options and advantages that secured loans can offer reveals a number of lesser known characteristics that position homeowner loans as a useful option for property owners.
1) More cash than a mortgage
One of the most simple, yet lesser known benefits of secured loans is, simply, the amount of money available. Whereas a mortgage can only raise capital to a maximum 85% of the value of a property, at least one broker is now offering secured loans at 95% LTV. This difference can equate to upwards of £50,000, which, depending on the purpose of the loan, can make a huge difference.
2) An alternative for entrepreneurs
The reasons for taking out secured loans can overlap with less attainable forms of lending such as business loans. Budding entrepreneurs may wish to explore secured loans as an alternative to the more traditional business loan. Finding the best rate loan for a start-up project is certainly not as simple as heading to the bank. When the potential value of the loan is taken into account as in point 1, the scope for using a secured loan for business is surprisingly broad.
3) Holding on to an interest only deal
In many cases, borrowers living on an interest only mortgage face serious barriers to further borrowing. Many mortgage providers will require their clients to convert interest only mortgages to repayments if they wish to take on further borrowing. Taking a side step and getting a secured loan will preserve this preferred repayment type whilst at the same time saving money – they tend to work out as the cheaper option.
4) Lengthier repayment options
A very quantifiable advantage of secured lending is the flexibility it offers over the repayment schedule. Whereas mortgage companies tend towards specifically structured repayments, the option to extend the payments over a longer more relaxed timescale is a hallmark of the secured loan.
5) Flexibility of credit status
A secured loan is a more individual product. As such, they can often take into account broader factors when considering borrower eligibility. Minor and occasional unsecured credit slips can often be ignored if they appear to be obviously non-relevant to the loan being sought.
6) Credit rating protected while comparing market rates
One of the biggest dangers for loan hunters is conducting credit searches that are reflected in their credit rating if rejected. Situations like that can quickly spiral those with reasonable credit ratings into a credit black hole. Reputable secured lenders use a soft search system however, which protects credit scores and allows the market options to be safely explored.
7) Fees are reflected in upfront loan cost
All fees on secured loans are added to the loan itself and met in the first instance by the packager. This allows secured loans to offer up a very transparent price comparison and to a large extent protects consumers from the traditional concern around hidden charges.
8) Avoid sacrificing a good mortgage deal
If clients are enjoying a particularly low standard variable rate for example, or are on a lifetime tracker just 1% above base then a re-mortgage will mean sacrificing this in favour of a new product rate which is guaranteed to be less favourable. The solution offered by secured loans is simply to leave the existing deal in place and combine it with a separate loan at a rate which is also likely to be preferential to the remortgage product rate.
9) Making co-habitation an asset
If a client is already on a mortgage and looking to secure further finances, the potential value of any co-habiting resident in the property can be used to raise the affordability of any new product. This is both useful in terms of retaining the pre-existing mortgage deal and securing the maximum loan value possible. It is also worth noting that whilst mortgages tend to be restricted to 5 x joint income, in the secured loan market rates of 7 x joint income are not unheard of.
10) Flexible loan utilisation
In the world of secured loans the client’s motivation for obtaining that loan are less limited. Technically secured loans are available for ‘any legal purpose’ which creates a lot of scope for use. Any purpose, from legal bills to property investment is acceptable in the eyes of most lenders.