Interest Only Secured Loan

If you already own a property and need access to cash, one option is to take out an interest-only secured loan. This is a popular way to pay for big ticket items such as home renovations or holidays, but it’s also a convenient way to consolidate debt.

Taking out this type of loan is a significant financial commitment so it’s best to be fully informed before making any decisions.

In this guide, we’ve put together everything you need to know including how interest-only secured loans work, how much you can borrow and how a broker can help secure you the best rate.

Read on for more information or jump to the section that’s relevant to you via the links below…

What is an interest-only secured loan?

An interest-only secured loan – also known as an interest-only second charge mortgage – is available to homeowners who already have a mortgage and who want to release equity to raise additional funds. The loan is secured against their existing property, which means the lender can repossess and sell it if the borrower doesn’t keep up with their payments.

As with first charge interest-only mortgages, you only pay back the interest charged on the loan each month. The full amount borrowed is then paid back at the end of the mortgage term.

To get approved for an interest-only second charge mortgage, your lender will ask for evidence of a payment plan. In other words, how you plan to pay back the capital. This could be via a property sale, inheritance or cash savings, among other things.

Remember, if you take out one of these loans, you’ll effectively have two mortgages to repay, so it’s always best to speak to a broker who can advise whether it’s right for your circumstances.

Types of interest-only secured loans

There are three main types:

Fixed term

The amount you pay each month remains the same throughout the term of the loan. This might suit you if you like to stick to a set budget.

Short-term fixed

Your payments stay the same for a set amount of time, for instance 2 or 5 years. After that, you pay back your lender’s standard variable rate which could go up or down depending on market movements.

Variable rate

The interest rate you pay is aligned with the Bank of England base rate. If it goes up, you could end up paying more, but if it goes down, you could pay less. With this option, your monthly repayments and the total amount you repay could increase or decrease over time.

Why would you need one?

People take out interest-only secured loans for various reasons. Arguably, the most common is to pay for home renovations such as loft conversions and extensions. It can take years to save for such large projects so releasing equity from their property is quicker and more convenient. It can also be cheaper than taking out an unsecured loan. As the loan is secured against a valuable asset – namely your home – you’ll typically get access to more competitive rates.

Borrowers also release equity in this way to pay for other expensive purchases such as weddings, holidays and cars. However, it’s also commonly used to consolidate debt. This means using the funds from your new loan to pay off all your other debts, such as credit card debt and personal loans, so you only have one repayment to make each month.

The fact that these loans are interest-only is appealing to borrowers who want to keep their monthly repayments as low as possible.

How to get an interest-only secured loan

Your first step should be to find a specialist mortgage broker with experience in this area as this will boost your chances of getting approved at the best terms available.

Using our free broker-matching service you can speak straight away to the right broker by simply making an enquiry online. They’ll be able to help with:

• Readying all the necessary paperwork
• Downloading your credit reports
• Finding the right lender and securing the best deal for you

How much can you borrow?

Lenders will have their own minimum and maximum borrowing limits but most won’t lend less than £10,000 or more than £1m. Your application will be considered on a case-by-case basis and the amount you’ll be able to borrow will depend on how closely you meet the eligibility criteria and the robustness of your repayment plan.

Eligibility criteria

You’ll have to meet a pretty strict set of criteria to be approved for one of these loans. Different lenders will have their own requirements but the following are some general rules you should expect to meet…

Equity in your property

Most lenders will require you to have a minimum amount of equity in your property. Often, the limit is £100,000 but it could be higher. If you have insufficient equity, your application is likely to be rejected straightaway.

You can calculate your equity by taking the value of your property and subtracting the amount you have left on your mortgage. For example, if the property is worth £350,000 and you have a mortgage of £250,000, your equity is £100,000.

The loan to value (LTV) for interest-only second charge mortgages is based on the equity you’ve built up in your property. LTV caps typically range from 50% to 80% but vary from lender to lender. If your lender has an LTV cap of 70%, you’ll only be able to borrow 70% of the equity you have in your property.

A viable repayment plan

At the end of the term, you have to pay back the full amount of capital initially borrowed. To make sure you’ll be able to do this, your lender will ask for proof of your repayment strategy. Options for this include: an inheritance, a lump sum from your pension, a property sale or investment earnings.

If there’s a shortfall, you may have to consider remortgaging, selling the property, paying the loan with cash or equity release (if you’re over 55).

Credit rating

As these types of loans are secured, having certain bad credit marks on your record shouldn’t damage your chances of getting approved too much. However, as with any type of loan or mortgage, having a clean credit history and a proven track record of paying back debt opens you up to more competitive deals.

Affordability

Although your monthly repayments will be less than if you’d opted for a capital repayment loan, lenders will still want to make sure you’re able to pay back two loans – that’s your initial, first charge mortgage and the interest on your second charge loan – at the same time. They’ll do this by thoroughly assessing your income versus your expenditure.

Which lenders offer these loans?

These loans are not particularly easy to come by and are typically only available through specialist lenders such as United Trust Bank, Shawbrook Bank and Masthaven.

Rates vary from lender to lender and how much you pay will depend on several factors including the term of the loan and your affordability assessment.

However, second charge loans typically command higher rates of interest because the first charge lender will always take priority if you can’t make your repayments. As such, you should expect to pay anything from 4%-9%.

A specialist broker can advise you on the best lender for your circumstances.

Alternative options

If an interest-only secured loan isn’t right for you, there are plenty of other ways to access cash. You could take out an unsecured personal loan, take on additional credit card debt if you qualify, or opt for equity release if you’re over 55.

Alternatively, you could remortgage. This would involve switching your existing mortgage to a new deal, either with your existing lender or a new one, and the lender adding the amount of cash you want released to your loan. This could be a good option if you’re coming to the end of your current deal. However, you may have to pay hefty exit fees if you want to remortgage before the end of your term. A broker can help you figure out what’s best for your circumstances.

Connect with an interest-only secured loan specialist

An interest-only secured loan can be quite a complex financial undertaking so it’s always best to seek advice from a specialist independent broker.

We have brokers in our network with excellent track records of helping borrowers secure these types of loan. Give us a call on 0808 189 2301 or make an enquiry and get matched with an expert today for a free initial conversation.

We hand-pick all the advisors in our network and rigorously vet them so you know you’re getting the best possible advice.