Secured finance or ‘secured loans’ refers to borrowing a huge sum and putting down some form of security which can be repossessed by the lender if the loan is not repaid.
It is only by releasing equity from the property or vehicle that allows the borrower to access to capital. Sometimes the risk is too great for the lender or their credit history is not sufficient, hence they need some security in place. Below we explain the different types of secured finance and the fees charged:
|Amount you can borrow||Fees (per annum)|
|Mortgage||Up to millions||1.2% (for first 48 months)|
|Equity Release||Up to millions||5% to 7%|
|Bridging Finance||Up to £25 million||6% to 14%|
|Vehicle Finance||Up to £50,000||Up to 300%|
|Invoice Finance||Up to millions||24% to 36%|
This is most common form of security used to raise funds. A property is always likely to maintain its value or be worth more over time. For a lender that needs to recover any funds, they have the option to repossess the property and resell it on the open market.
A mortgage is a type of secured loan because although the homeowner is paying interest every month, they are essentially borrowing it from their bank who owns it until the mortgage is paid off. In the event that the mortgage repayments are not kept up, the bank or mortgage provider has the right to repossess your property.
Mortgage rates vary based on the buyer’s credit and affordability and also market conditions such as the Bank of England base rate and whether your loan is fixed or variable. Most new mortgages get an introductory rate of around 1.2% to 1.3% per year for the first 48 months, before being put onto a standard variable rate which can be as high as 7%. (Source: Money Advice Service)
Things that can lower your rate include a good credit rating, a higher deposit and also being a first charge over a second charge loan.
If you want to use your home or flat as collateral but still want to raise additional finance, you can look at getting a second mortgage. This means that you will have more repayments to make, but they come in second priority after your first mortgage. Naturally, this means that the amount you can borrow is less and the fees charged at a little more to manage the risk.
Equity release is typically aimed at the older population who are able to release any value from their existing home so that they can continue to use it when they are alive. You are essentially giving up part of your property in exchange for money right now that you can use.
There are different variations available, but providers can offer 20% to 70% secured on your home, giving you the money upfront. But, when you die, the lender then owns 20% to 70% of the property and they make a nice return because the property is likely to go up in value.
There are ways to release equity from your home without having to give it up eventually. After all, you may want to pass it onto your children as inheritance. Most lenders in this space charge around 5% to 7% per annum based on the amount you have borrowed.
This is a type of short term finance used mainly to purchase property within a tight deadline. Used for a maximum of 24 months, homeowners will use bridging finance as a way to borrow money to buy a new house when their existing one has not sold yet. Then, when their house eventually does sell, they pay off the loan.
Similarly, it is used by a buy to let property developers who borrow up to £25 million to renovate a property and then sell it at a higher price or rent it out to tenants. At the end of the loan term, they can refinance their loan under different terms or repay in full.
The rates charged by most bridging lenders ranges from 0.44% to 2.0% per month (or up to 24% per annum) – hence it is considered a costly short-term type of borrowing. The loan is always secured on the property in question so the borrower risks loses this if they cannot keep up with repayments. (Source: Bridging Loan Hub)
Those with vehicles such as bikes, cars and vans can use the value of their automobile to borrow money. Specifically, logbook loans allow you to borrow up to £50,000 using your vehicle as collateral.
Motor finance is another form of secured loan as you are technically renting your vehicle from dealer and then it can be taken away if you do not repay on time.
Invoice factoring or ‘invoice finance’ allows companies to release any cash that is locked up in invoices. There are some businesses which receive big orders but need a lot of capital in order to fund their overheads such as staff, materials and technology.
By showing a lender proof of your invoices, you can receive up to 80% of the cash upfront charged at around 2 to 3% interest per month – and then repay upon the completion of your growth period or when the invoice has been paid. There is typically no limit to the amount you can borrow and the industry is said to be worth around £22.2 billion in the UK.
This is form of finance is very common for construction jobs, caterers and fashion designers that receive an order a big order or contract but do not get paid until the end. They require an injection of finance to pay for the staff and inventory to complete the order, and then once completed and their invoice has been repaid, they can repay their invoice loan too.