Securing a loan against your property for any reason comes with a degree of risk by its very nature. Some loans such as mortgages will of course need to be secured against a property, whereas in other cases, you may not need to secure the loan against bricks and mortar if at all.
One of the key benefits of securing loans in this way is that from the borrower’s perspective, more money can be borrowed so long as there is enough equity owned by the borrower in the property. For example, in the case of loans for home improvements and refurbishments, the borrower will need to own enough equity in the property to satisfy the underwriters as part of the due diligence run by lenders.
Why Do Lenders Require a Property For the Loan?
From a lender’s perspective the risk is hugely reduced with property loans as the very property the loan is often to be used upon acts as a form of collateral on the loan. This means that should the borrower default on the loan and fail to make their required repayments, the borrower can undertake court proceedings to seize the property to recoup their losses.
There are numerous reasons why people utilise loans that are secured to their property. It is not just about risk, but also about the amount of money that can be borrowed as well as some loans and financial arrangements requiring a property or other high value asset as part of the arrangement between the borrower and the lender.
What Types of Loans Require Properties as Security?
Typically, it is mortgages of any nature which require a property against which they must be secured. Both first charge and second charge mortgages will require a property so that the lender can be satisfied that the money they lend; usually many tens or hundreds of thousands of pounds is provided with as little risk as possible.
First Charge Mortgages – These mortgages are those which most people will be most familiar with and these mortgages are the most commonly utilised form of secured finance in the UK if not the world. The basic premise is familiar whereby a percentage of the value of the property is borrowed by the owner and that amount is then secured against the property with repayments plus interest made over anywhere from a handful of years to a few decades.
Second Charge Mortgages – These, as their name suggests are mortgages which are taken out in addition to a regular first charge mortgage. They require the agreement and consent of both the first and second charge lenders. However, if a borrower owns enough equity in a property and is already paying off their first charge mortgage, so long as certain criteria are met, they can take out a second charge loan on the property. However, these loans do tend to come with additional charges and higher interest which is worth bearing in mind before applying for the finance.
Using Property Loans for Business Purposes
It is possible to use loans which are secured against a property for business investment purposes and this is something which some business owners may prefer compared to utilising investors.
For example, there are many venture capitalists (VCs) in the UK and many of the top UK VCs are very willing to lend to businesses and startups. However, as an investor-business relationship, the business will need to give up some degree of control in the form of shares and equity, something that may not be right for every business.
Therefore, some business owners may well turn to loans secured against a property they own. It is usually recommended not to secure a loan of this nature against your primary residence and place of abode; your home. The reason for this being that no matter what happens, if your home property is separate from your business you will always have a roof over your head.
You should always manage and consider the risks involved when it comes to securing a loan against a property as there is always the risk of having the property repossessed should you forfeit the loan and fail to make repayments. If you do end up having your property taken as a result of failure to repay loans you will also find it incredibly difficult to secure any future credit for your business.