Second mortgages are typically available from £10,000 to £250,000, or even more in some instances.

According to the Finance and Leasing Association, the average loan size for a second mortgage in July 2023 was £46,579

The most popular reason people currently take out second mortgages is to consolidate their current debt and replace it with one single lower repayment. The second reason is to carry out home improvements; the third is a combination of debt consolidation and home improvements. What’s the better option for you? Let’s consider unsecured versus secured loans.

 

Unsecured vs. Secured Loans

 

Unsecured Loans

With an unsecured loan, also known as a personal loan, the main benefit is that you are not offering your home as security, meaning that you won't lose your home if you cannot repay your loan.

Another benefit is that the interest rate is typically fixed, meaning the repayment remains unchanged throughout the loan term, making it easier to budget.

While unsecured loans are quick to arrange, there are some drawbacks:

• A few lenders may consider offering unsecured loans up to around £40,000, but most loans are for smaller amounts, typically £3,000 - £15,000

• The term you can borrow the money over is usually restricted from 1 year to 7 years, meaning that monthly repayments can be high over such a short repayment term.

• To get a competitive rate with an unsecured or personal loan, you need a good credit rating and are preferably a homeowner.

 

Secured Loans

With a secured loan, also known as a second mortgage or second charge mortgage, the main disadvantage is that you are offering your home as security to the lender, meaning that if you default on the loan, you potentially risk having your home repossessed.

Other considerations when taking out a secured loan are:

• Most people take out a secured loan to consolidate their current finances and have one lower monthly repayment. This involves borrowing an amount to clear all credit cards, loans and other debts. The money is generally borrowed over a longer term, say 20 years, meaning you have one lower monthly repayment.

• The drawback of repaying your finances over 20 years is that you would pay back much more interest than if you had kept repaying your existing debts.

• Fees can be high. A mortgage broker will provide a mortgage illustration clearly highlighting all the fees associated with setting up the loan. Fees are often higher for secured loans than standard mortgages, partially because the mortgage broker carries out some of the legal work with secured loans.

• Early repayment charges - some secured loans carry early repayment charges (ERCs) if you settle the loan within a certain period. Again, any ERCs will be clearly shown on a mortgage illustration.

• Secured loans take much longer to arrange than unsecured loans. Depending on various factors, secured loans can take several months to arrange. For example, if the lender requires an internal valuation, this could add three weeks to the application process.

 

What can I use a £25,000 to £50,000 loan for?

 

There are many reasons why you could need or want a £25,000 to £50,000 loan.

• Home improvements - many people borrow to improve their home, whether that’s an extension, a conservatory, a new kitchen or bathroom, or essential maintenance.

• Business purposes - some lenders are prepared to lend for a business cash injection or expansion. These loans usually fall outside the Financial Conduct Authority regulation, so it’s essential to take professional advice before entering into any loan agreement.

• Debt consolidation - as mentioned, if you’ve got numerous credit commitments and are struggling to keep up the repayments, you could consider a consolidation loan where you merge all commitments into a single loan with a lower monthly payment.

 

Your loans for £25,000 - £50,000 repayment plan

 

With a secured loan, you must be confident that you can easily afford the proposed monthly repayment. 

When assessing the amount you can afford each month, it would be sensible to build in a buffer to cover possible increases in your outgoings, such as your council tax, mortgage repayment, gas and electricity, etc. You can use an online loan calculator to give you an indication of the monthly repayment on a loan of, say, £50,000.

You need to be confident that you can maintain payments throughout the whole term of the loan. Missing repayments could result in losing your home.

Some borrowers choose to take out a loan over a long period, say 25 years. While taking the loan over a longer term reduces the monthly loan repayment, it means that if you keep the loan for the whole term, you will have repaid a massive amount in interest. To avoid this, most lenders allow you to make additional capital repayments, which means you finish the loan in a shorter period and pay less interest overall.

If you need help making the monthly repayments, you must contact your lender. They may be able to offer a payment holiday where you are not required to make a repayment for three or six months. Alternatively, they could switch your loan to interest only for a period.

 

Can I Borrow £50,000 With Bad Credit?

 

Subject to how bad your credit is, you could get a £25,000 loan or even a £50,000 loan with a second mortgage. The lender has the security of knowing they could repossess your home if you stopped making payments for whatever reason.

If you have lots of recent adverse credit registered against you, the likelihood is that the interest rate offered to you will be very high. In this situation, you should think carefully before proceeding with any loan.

Rather than take out a homeowner loan with bad credit, it might be worth waiting until your credit has improved so that your score is much higher when a lender carries out the credit checks.

Regardless of the type of loan, any lender will want to know how you got a bad credit record. It might be that you were made redundant, and it took a while to find another job. If you are now employed and have passed your probation period, then a lender might look at the application favourably.

It would make sense for you to look for income protection insurance, which would pay out a certain amount each month in the event of redundancy. 

 

What Credit Score Do I Need For An Unsecured Loan?

 

The credit score required to get an unsecured loan varies from lender to lender. The lender will not publish the score needed to get a loan. If you have a good credit score, the interest rate and representative APR will be lower.

You can obtain a credit report from any of the three main credit reference agencies: Equifax, Experian and TransUnion. Your credit score will not be impacted if you obtain a copy of your credit report.

They will also have other criteria, such as:

• Are you a homeowner?

• Are you employed or self-employed?

• How long have you been in your job?

If you apply for a loan and complete a loan application form, you will typically hear within 24 - 48 hours if you have been successful.

 

For more information about secured loans or second mortgages, contact our team today.