How Secured Loans Differ From Mortgages

It is very easy to get mixed up between secured loans and a mortgages. That is because in a fundamental sense, they are the same: they involve the home, and the home is the collateral for both.

A mortgage is the debt transaction you entered into with a lender when you first purchased your home. You put down a deposit (usually 20 percent of the purchase price) and the lender provided the rest of the money to pay the seller of the home. In exchange for the debt provided by the lender, you signed the mortgage, which allows to the lender the first charge on your home.

Until you repay the mortgage in full, you are not yet the true owner of the home; in terms of claim to the money invested in the home, the lender is still the owner, or at least a co-owner. But the lender, who has put more money into the home than you, allows you to occupy it and enjoy the benefits of ownership because of the mortgage.

A secured loan, on the other hand, is a debt transaction involving the home that you enter into either with your mortgage lender or with another lender. The fundamental difference is that when you offer your home as collateral, you are actually offering only that portion of the home which you truly own, that is, your equity in the home.

That equity consists of the difference between the market value of the house less the balance on the mortgage (first charge) still owed to your mortgage lender. The lender cannot claim any right to any appreciation in property value. The total money you have invested in the home, i.e. your deposit plus all the mortgage payments you have made over the years, is subsumed into the equity.

A mortgage has lower interest rates than secured loans because the risk to the lender is less. Secured loans will have higher interest because the lender has a greater risk; despite the claim on your house, the secured loan lender only stands next in line to the mortgage lender, whose claim must be satisfied first.

Although you pay less interest on a mortgage, your costs to arrange the mortgage are greater than for a secured loan. There are property valuations to be done and legal documentation to be completed. Your arrangement fees can be costly, and can reach about 2 percent of the mortgage amount.

It is thus not easy to arrange for a mortgage. When you need money, you actually have the option of topping up your existing mortgage with an advance mortgage loan. Lenders also have various arrangements for mortgages. If you raise money by changing your main mortgage, the new mortgage can be given special rates through fixed rate and discount rate combinations. You could also re-mortgage the property, but this may cost you a small fortune in early repayment and redemption penalties (although this may be offset by a favourable mortgage rate).

If the amount of money is not very large, your better option may be a secured loan, which involves a second charge on your home. Although the interest rate will be higher, the arrangements necessary to obtain the secured loan will not be as tedious as with a mortgage. A mortgage may take a month or more to set up; a secured loan transaction should be completed in a few weeks.

A secured loan may be advantageous if your circumstances have caused a change in your credit history from the time the main mortgage was established. It may be that your credit position at this point does not encourage your mortgage lender to lend you more money. A secured loan from a second charge lender will thus give you the funds you need.