A Guide on Secured loans (Second Charge Mortgages)

A secured personal loan is also known as a second charge mortgage. It lets you borrow a lump sum of money which is secured against a property.

The property is secured by the lender through a ‘second charge’, which ranks after your main mortgage (which is held on a ‘first charge’ basis). This is a legal arrangement that is registered with the Land Registry.

You can use the money for whatever purpose you want (provided that it is not illegal or for commercial gain). However, second charge mortgages are usually used to fund large purchases (such as purchasing a new car), home improvements, or to consolidate existing debts.

Throughout the term of the loan, regular monthly repayments must be made. The term of the loan can usually be between five and 25 years.

The Financial Conduct Authority (FCA) have been regulating the selling and administration of first charge loans for quite some time. The FCA now also regulates second charge loans. Second charge loans are subject to exactly the same rules as regular mortgages.  This implies that you will need to be able to prove that you can afford to repay both the first mortgage and the second mortgages, with some room to spare.

Who is a secured second charge mortgage suitable for?

Secured loans are for those borrowers with an existing mortgage who want to borrow larger amounts of money than what standard personal loans can offer, usually a maximum of £250,000. Borrowers tend to have established equity in their homes that they can utilise as security against the loan.

What should I look for when taking out a second charge mortgage?

There are some catches and things that you need to understand before you commit yourself to this kind of secured loan, including:

  • The ‘second charge’ on your property signifies that if you default on a secured loan, the lender can eventually take you to court and order the repossession of your property. The first charge lender gets to be paid back first, and the second charge lender receives what is left, up to the outstanding debt’s value.
  • Interest rates of second charge mortgages are usually variable, which means that it is difficult to budget as the rate could increase or decrease. If you also have a  variable rate mortgage,  you might be affected twice if rates rise, so make sure that you can afford it.
  • Consolidating debt is usually seen as the last resort of homeowners. However, it can be a great way to get you out of a hole in the short term. Remember, if you opt for lower monthly repayments in return for a longer loan period, you will end up paying more in the long term.

What You Should Know Regarding a Graduate Loan

Graduate loans work in similarly the same way as unsecured personal loans. However, banks manage to grant better rates for graduates. You will usually have to possess a current account with the same bank or building a society to be qualified for a graduate loan.

After agreeing to make regular repayments (usually by direct debit), a lump sum will be lent to you. Graduate loans are available for up to a maximum of £25K. The said loan is repayable over a predetermined period, usually between a period of six months to 10 years

Interest will be charged by the lender on the borrowed amount. The interest tends to be fixed at the start of the loan, which implies that repayments will remain the same throughout the term; some loans, including flexible loans, however, can be variable.

This interest charge is registered as an APR (Annual Percentage Rate). The law requires all lenders to quote the APR. The advertised typical APR quoted is needed to be proposed to at least 50% of borrowers.

The APR usually depends on the size, and sometimes the term, of the graduate loan. This implies that the best rate for one graduate loan amount may not be the best rate on all loans.

The same rate for all their borrowers may not be offered by some lenders. That is why you need to check the best rate for the amount and term you are aiming for.

Things to consider regarding graduate loans:

1. Representative APR

You may not always receive the advertised representative APR on a graduate loan. The rate you are offered can depend on your credit rating. Lenders will use a scoring system to check how credit-worthy an applicant is.

2. Graduate loan early settlement penalties

You can save hundreds of pounds in interest if you pay off your graduate loan early. However, it is crucial to remember penalties are applied by a number of lender to those who opt to close their graduate loans prior to the end of the term.

3. Graduate loan deferment periods and payment breaks

Many lenders will allow a grace period between the time that you have received your loan and the time that the first payment is needed to be made. Interest is still charged over this period even though this will give you a break from payments thus, increasing the total interest payable. Some lenders may also offer breaks during the term of the loan. However, interest is charged on the outstanding balance. This signifies that a higher loan amount is left unpaid for a longer period. Charges may also be incurred during these breaks.

4. Graduate loans & same-day funds

Same-day funds facilities are offered by some lenders. Same-day funds facility means that you receive your money on the same day that you complete the application. Usually, there will be a fee for this type of service, which can be as high as £50. So you have to consider this carefully.

5. Direct debits

A direct debit is required by most lenders so you can pay the monthly instalments on your graduate loan. You need to make sure that your bank account will be able to accept these and the money is available for making payments.

6. Payment protection insurance for graduate loans

This is an optional insurance that will satisfy your repayments should you not be able to work under certain circumstances. Which includes:

  • Accident
  • Death
  • Unemployment
  • Sickness

You should know that it is of utmost importance to examine the small print to make sure that the cover that is provided is suitable to your needs.

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