A secured loan uses your home as collateral. It allows borrowing larger amounts—ideal for home improvements or debt consolidation.
Because your home is at risk, understanding the full cost is essential. A small fee or interest rate difference can add thousands over the loan term.
Interest Rate Isn't the Whole Story
Lower interest rates don’t always mean cheaper loans. Some lenders add fees that increase the total cost.
Look at the Annual Percentage Rate of Charge (APRC). It includes interest and certain fees. This gives a clearer picture of the overall cost.
APRC isn’t perfect. It doesn’t account for future interest rate changes. A loan with a fixed rate may still cost more if fees are added.
- Arrangement fees can range from £995 to £3,000. Some charge a percentage of the loan amount.
- Some lenders let you add fees to the loan. This means you pay interest on the fee, increasing total cost.
- Property valuations may cost extra. More detailed checks, especially for high-value homes, can be expensive.
- Mortgage brokers may charge fees. Some don’t charge borrowers directly. Compare options before choosing one.
For example, borrowing £30,000 over 15 years at 7% interest adds £2,000 in fees. That results in £1,200 extra interest over the term.
Always review the loan’s key facts document. This includes interest rate, monthly payments, and fees. Ask the lender to explain anything unclear.
Free, impartial advice is available from MoneyHelper.
How Your Loan-to-Value Affects Borrowing Costs
Lenders assess your Combined Loan to Value (CLTV). This shows how much of your home’s value is covered by debt.
Lower CLTV means less risk. You’re more likely to get a lower interest rate.
To calculate CLTV:
- Add your remaining mortgage balance to the new loan amount.
- Divide that by your home’s value.
- Multiply by 100 to get a percentage.
CLTV is 60%.
With a 60% CLTV, you have 40% equity. This may qualify you for better rates.
As CLTV rises—especially above 80%—interest rates may increase. Fewer lenders may offer loans at higher levels.
Lenders may use online valuations or require a physical appraisal. Check how much your property is worth before applying.
Use the KIS Finance calculator to estimate borrowing capacity.
Having equity doesn’t mean borrowing is wise. You must still ensure repayments are affordable.
Fixed vs Variable Interest Rates
Choose between fixed and variable interest rates. Each affects monthly payments differently.
A fixed rate stays the same for a set period—usually two to five years. This helps with budgeting. Payments won’t rise even if interest rates go up.
With a variable rate, payments can go up or down. Some follow the Bank of England base rate. Others follow the lender’s Standard Variable Rate (SVR).
Lenders can change their SVR. So, even if the Bank of England doesn’t raise rates, your payments could increase.
Loan terms range from three to 30 years. Longer terms mean lower monthly payments but more total interest.
If you have a variable loan and interest rates rise, your monthly payments will increase. This could strain household budgets.
Switching to a fixed rate may help. But fees could make it unwise. Check your loan terms before acting.
Make extra payments to reduce interest. This shortens the loan term and saves money. But check for early repayment charges first.
Can You Overpay Without Fees?
Some lenders allow overpayments without penalty. Others charge fees for early repayment or large overpayments.
For example, a five-year fixed rate deal might charge:
These are examples. Actual charges vary by lender.
Early repayment charges can add hundreds or thousands of pounds. They’re especially common in fixed-rate loans.
Ask your lender for a settlement figure. This shows how much you’d need to pay to clear the loan—including interest and charges.
Settlement figures have expiry dates. Check how long they’re valid.
Some lenders use extra payments to shorten the loan. Others reduce monthly payments. If your goal is to save interest, shortening the term is more effective.
Even small overpayments can save money over time. But ensure you still have funds for daily expenses and emergencies.
Think Carefully Before Borrowing Against Your Home
Using your home as security means you risk losing it if you can’t repay.
Home improvements—like loft conversions or energy upgrades—can add value. But there’s no guarantee you’ll get a return on investment.
Spending £30,000 on an extension doesn’t mean your home will be worth £30,000 more. Research local property values before spending.
Consider saving instead. If improvements aren’t urgent, delaying may be better.
Using a secured loan to pay off credit cards or other debts combines multiple debts into one. This may simplify payments.
But it turns unsecured debts into secured ones. If you miss payments, your home is at risk.
Secured loans affect your credit record. Agencies like Experian, Equifax, and TransUnion record your borrowing and payment history.
Lenders check income, spending, existing debts, and property value. You may need to provide payslips or tax returns.
Even if you can afford a loan now, your situation may change. Job loss or unexpected expenses could make repayments harder.
If you struggle, contact your lender early. They may offer support or payment plans.
Missing payments can lead to extra charges, credit damage, and legal action. Repossession is a last resort.
If your home is sold, the main mortgage lender is paid first. Then the secured loan is settled. Any remaining debt stays your responsibility.
Get help early. Free advice is available from StepChange, National Debtline, and Citizens Advice.
Before deciding, compare all loan options. Check interest rates, fees, and total repayments.
Consider alternatives: unsecured personal loans, borrowing from your mortgage lender, or saving.
Secured loans are a major financial decision. Taking time to understand the full cost can prevent future stress and financial loss.
Sources & further reading
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