Interest-Only Secured Loans

Interest only secured loans can be a really helpful way to free up equity for those looking to undertake home renovations or take an extended holiday.

In this article you’ll find all the information you need about how interest-only secured loans work, where to find the best rates and how an experienced broker can help guide you through the process.

What is an interest only secured loan?

An interest only secured loan is available to homeowners who already have a mortgage and want to take out additional borrowing. As the name suggests, the loan is usually secured against your property.

They’re often referred to as ‘second charge mortgages’ with your original home loan acting as first charge in the event of repossession.

For interest-only loans your monthly payments will consist solely of the interest element and the original capital amount borrowed has to be repaid in full at the end of the term using a separate repayment vehicle.

As a result, your monthly payments will be much lower than the capital and repayment method as you’re only paying interest during the term of the loan.

Secured vs unsecured loans

A secured loan means the lending is “secured” against an asset – in this case your home. If you are unable to repay the loan, the lender can repossess the asset to recoup the debt.

Unsecured loans are not secured against an asset.

This means the lender has no security. As a result, the criteria for lending is often stricter and they come with higher interest rates to reflect the increased risk level.

Examples of unsecured loans are credit cards, overdrafts and personal loans.

What happens at the end of the term?

When you take out this type of second charge mortgage, you will agree a repayment vehicle with your lender.

As long as you monitor this throughout the loan term, you should be able to pay back the full amount without any problems.

Some examples of repayment vehicles include: selling the property; a tax-free lump sum from a pension plan; an ISA; family inheritance.

If there’s a shortfall, you’ll need to look at other options.

This could include: remortgaging your property again; equity release (if you’re over 55), or paying the outstanding balance with cash.

Why these loans are used

There’s a host of reasons why homeowners might want to use interest-only secured loans from home renovations to that holiday of a lifetime you’ve always promised yourself.

Rather than waiting to have the spare cash available, you can use the equity in your home to raise the funds you need.

Some people also use them to consolidate all their shorter term debts – like credit cards and loans – into one monthly payment.

This is an attractive option as these loans tend to have lower interest rates and over longer terms, allowing for more manageable monthly payments.

What are the advantages?

Interest only secured loans are attractive for a number of reasons, such as:

• Lower repayments: With only the interest element to cover, your monthly repayments will be much lower than a full repayment alternative
• Lower interest rates: As they’re secured, this type of loan is seen as lower risk by a lender, therefore, they tend to come with lower interest rates than an unsecured loan
• Flexible terms: Lenders usually allow terms of up to 15 years, some can stretch to 20 or even 25 years, whereas unsecured loans are usually available for up to seven years
• Credit Rating: If you’ve had bad credit in the past but can provide the loan security, you can rebuild your score as long as you keep up with your repayments

What are the disadvantages?

On the downside, however, the main disadvantages of this type of loan would be:

• Capital repayment not guaranteed: If your repayment vehicle doesn’t remain on track, there’s a risk you won’t be able to meet your obligations at the end of the term
• Not widely available: Lender’s for this type of borrowing can be hard to find if you’re searching on your own.

How a broker can help

If you want to get your application off to the best start you should speak to a specialist broker.

As interest-only second charge mortgages aren’t widely available you might struggle to find the best deal for your circumstances. This is where we can help.

The brokers we work with have access to the whole market – including exclusive deals not available to the general public.

If you make an enquiry we can arrange for a specialist in this area to contact you directly.

How to find the best lenders and rates

There are a range of specialist mortgage lenders that offer interest only secured loans. They include United Trust Bank, Shawbrook Bank and Masthaven. At the time of writing (May 2023), interest rates tend to range between 6.5% and 9% but this could change at any time.

The best way to find the lowest rates is to use a broker who specialises in interest-only secured loans. That way, you would have access to the entire market, including exclusive rates and deals that aren’t available to the general public, and get bespoke advice about which product to choose.

 

Borrowing limits and payments

The amount you can borrow will vary significantly depending on your personal circumstances.

Lenders will take into consideration the amount of equity available in the property as well as adhering to their own loan to value (LTV) criteria.

Minimum equity requirement

Many lenders have a minimum equity requirement. This is usually around £100,000, but some providers do set this amount as higher.

You can calculate the equity you have in the property by taking the total value of it and subtracting the amount you have left on your mortgage.

For example, if your property is worth £250,000 and you have a mortgage of £100,000, you will have £150,000 of equity.

Loan to value (LTV) criteria

The loan to value (LTV) ratio is also important to many lenders. This refers to the maximum amount a lender will offer, against the value of your property.

LTV caps range from around 50% to 80%.

If the lender has an LTV criteria of 60%, this means you will only be able to borrow a maximum of 60% of the equity you have in the property.

Borrowing limits

Most lenders will have a minimum and maximum amount they are prepared to lend. This varies substantially between providers, but most won’t lend less than £10,000.

The maximum amount could be anything between £125,000 and £1,000,000.

To be offered the maximum loan available, you will have to be able to prove you can make the full capital repayment at the end of your loan term.

Other things to consider

There are three main types of interest-only secured loan. If you opt for this kind of borrowing, you should consider which will be best for your circumstances.

Fixed term

You pay a fixed amount each month throughout the loan term. Your repayments won’t change, which might make budgeting easier.

Short-term fixed rate

These start off very similar to fixed-rate mortgages. You pay a fixed amount every month throughout the short term of the fixed rate – this is usually between 2 and 5 years.

After this term, your repayments will change to the lender’s standard variable rate. This means they could go up or down depending on market movements.

Variable rate

With this option, the interest rate will change when the Bank of England base rate changes.

This means your monthly repayments and the total amount you repay could increase or decrease over time.

If interest rates go up you could repay a lot more than you originally budgeted for, meaning you could end up struggling to meet your repayments.

Other options available

If you’re looking to get access to more cash, there are other options out there. Some people opt for equity release – this is usually only available for over 55s.

Others choose to take out an unsecured personal loan or take on additional credit card debt if they can get additional credit approved.

Remortgaging

Rather than taking out an interest only secured loan, you could look to remortgage your property to free up some extra cash.

This can be a good option if the existing deal on your first charge mortgage is due to come to an end and you’d rather stick to just one monthly repayment.

However, remortgaging may prove difficult if your age at the end of the proposed new term falls outside a lender’s maximum age range.

Whilst most lenders have a cut off age of 70-75, some will allow you to borrow up to the age of 85 and a few now have no age limits at all.

Get matched with an experienced interest-only mortgage broker

Getting an interest-only secured loan is not always straightforward. To maximise your chances of getting approved – and then getting the best deal available – you should speak to a specialist broker.

This guidance will prove invaluable throughout the process.

We can help with this. The brokers we work with have experience helping people get this type of specialised lending.

So, give us a call on 0808 189 0463 or make an enquiry and we can arrange for a free, no obligation chat with an advisor we work with straight away.