Secured loans fall into three main categories:
• Second charge mortgages
• New larger mortgages
• Further advances on an existing mortgage
Additionally, homeowners aged 55 or older may be able to access a lifetime mortgage. This type of equity release mortgage has the potential to reduce your debt repayments to zero, but interest will continue to roll-up on the borrowed amount until you sell the property, go into care, or pass away.
In each case multiple unsecured debts are consolidated into a single loan that’s secured against your home.
Secured consolidation loans could potentially:
• Reduce your total monthly debt repayments
• Reduce the overall rate of interest that you’re paying
Large loans are risky for lenders, but when they have security against your home that credit risk diminishes significantly. This makes it easier for them to offer a large loan at a fair rate of interest, increasing your chances of affordably consolidating your debts.
Provided you keep up with the repayments, a secured loan will not significantly damage your credit rating. In some circumstances your credit rating might improve.
There are a number of potential costs including:
• Broker fee
• Arrangement fee
• Valuation fee
Consider these costs when considering the benefits of secured debt consolidation. You might have an option to add the costs to your new loan, but doing so will result in extra interest being added for a long period of time.
Secured debt consolidation can create serious risks:
• Loss of your home if you default
• Paying more interest in the long-term
• Build-up of new unsecured debt
These risks are often underplayed by lenders and loan brokers. The risk-level is in fact so high that the UK government’s Money Advice Service recommends getting debt advice before securing unsecured debt against your home.