It’s not uncommon to hear the terms ‘secured loan’ and ‘2nd mortgage’ being used interchangeably. To such an extent that many (if not most) people believe they refer to the same thing. In reality, there are important differences between the two credit facilities that must be taken into account. Particularly for prospective borrowers who’ve yet to determine which loan product best suits their needs.
Roughly defined, a second mortgage is pretty much identical to a conventional mortgage. Typically issued for tens or hundreds of thousands of pounds, a second mortgage takes its name from its position behind the primary mortgage in terms of priority. Aside from its position behind the primary mortgage, it is largely an identical loan product.
With secured loans, the potential applications and general borrowing criteria are far more flexible. While it’s true to say that most secured loan products use the applicant’s property (domestic or commercial) as collateral, some lenders are happy to accept various different types of assets. Just as long as the combined value of the collateral can cover the full costs of the loan, the borrower’s application may be accepted. In addition, secured loans can be issued for almost any purpose whatsoever. That being, they don’t necessarily have to be used to fund property purchases or investments.
Secured loans are often used for renovating and improving properties, repurposing properties prior to sale or simply consolidating debts. In accordance with the applicant’s equity, it’s possible to borrow a significant sum of money through a secured loan at a competitive rate of interest. It’s also easy to explore the various options available with an online secured loan calculator.
But when is a second mortgage considered a preferable option? What are the most common applications of secured loans and when might you consider applying for one?
Investments and Business Opportunities
Technically speaking, there are endless applications for which a second mortgage could be used. Nevertheless, the vast majority of second mortgages are issued for investment and general business purposes.
In a typical working example, a homeowner has decided to start a new business and needs to raise the initial capital to get things off the ground. They use the equity tied up in their home to access the money needed by way of a second mortgage, which they’re then able to repay monthly as the business becomes operational.
Similarly, it could be that an individual or a couple wishes to purchase a second home, either for personal/family use or to rent out. Rather than applying for a conventional mortgage, they could opt for a second mortgage secured against the value of their current home. The resulting rental payments from their future tenants (where applicable) could be used to meet the second mortgage payments and ultimately cover all borrowing costs. Significantly easier than pulling together the deposit needed to apply for a traditional mortgage.
Comparing All Options
The differences between secured loans and second mortgages may be subtle, but are nonetheless essential to take into account. There are advantages and disadvantages to both products, in accordance with the financial circumstances and requirements of the applicant. Affordability should also be taken into account, which will be determined by the terms and conditions of the agreement you enter into.
As a result, it’s important to ensure that all available options are considered before deciding which product to apply for. Working with an independent broker, a whole-of-market loan comparison service should be carried out, incorporating specialist lenders not on the UK High Street.
Depending on your requirements, it may also be useful to consider additional secured lending products, such as bridging loans, auction finance, property development loans and so on. Your broker will advise you on the most appropriate funding solution.
Article by iConquer