Better regulation ahead for homeowner loans
Homeowners who take out top-up loans secured against their property will soon have the same protections that apply to mortgages, reducing the scope for dodgy lending practices and sky-high interest rates.
At present, ‘secured loans’ are regulated by the Office of Fair Trading but the Financial Services Authority (FSA), which regulates mortgages, has far wider powers and imposes strict rules on mortgage lenders and brokers. The government has signalled that the FSA will soon be handed authority to regulate both types of loan.
As the recession and the slump in the housing market are forcing many more homeowners to stay in homes they might otherwise have sold, more and more of them are turning to additional loans secured on property. If your existing mortgage lender won’t lend you more money to add an extra room or make other improvements, you’ll usually be able to find another lender who will - but you may pay a much higher rate of interest, and your loan will probably be on terms that give you less protection if you become unable to make repayments.
If you’re investigating an unsecured loan, here are two key points:
Try your existing lender first
Many people who apply for secured loans don’t even approach their mortgage lender. But you can’t hide the fact that you’re borrowing more. Your existing lender will be notified by any other lender that secures a legal charge over your property (this is a legal requirement). In most cases, the interest rates charged by mortgage lenders on secured loans are lower than those you’d pay elsewhere. So your existing mortgage lender should be first port of call if you need to borrow more and fit their lending criteria.
Watch the penalties
The key difference between mortgages and secured loans is that most mortgages don’t have repayment penalties, and those that do have penalties that run out after a few years. In contrast, most unsecured loans have early repayment penalties that apply throughout the term of the loan, and since a lot of these loans are in fact paid off early, it’s these penalties you should look at closely when shopping around for a loan.
