What are 125% Secured Loans?
The term “125% secured loan” is actually something of a misnomer, because only part of the loan is actually secured. Typically, the secured part of the loan is for between 90% and 95% of the value of your property (with the property acting as the security) and the other 30% – 35% is unsecured. So a 125% secured loan is actually only a partially secured loan.
Lenders who offer 125 secured loans offer both the secured and the unsecured parts of the loan at the same interest rate, as long as those two parts of the loan continue to be linked.
In the UK, there are different regulations applied to secured and unsecured loans. So for regulatory purposes the two parts are treated separately. The unsecured 30% – 35% component of the loan would not be regulated by the FSA (Financial Services Authority).
Why would I want to take out a 125% secured loan?
Say for example you wanted to buy a property with a value of £100,000. But the property is in need of all sorts of improvements that will set you back another £25,000.
With a standard mortgage, you would typically only be able to borrow up to 95% of the value of the property (i.e. £95,000). But if you can find a lender willing to grant you a 125 secured loan, you have the possibility of borrowing the full £125,000. £95,000 of this amount would be secured against your property and the other £30,000 would be unsecured.
Being able to borrow 125% of the property’s value would allow you to undertake the necessary improvements and thereby increase the total value to your home. From the lender’s perspective, this is seen to be a good risk, compared with say if you wanted the additional money to buy a new car for example.
How much will it cost me?
Interest rates for 125 secured loans vary and are dependent upon a number of things. First of all, as we all know, interest rates go up and down with the economy. In the late 1980’s in the UK for example, mortgage interest rates were as high as 15%, whereas now you can get mortgages in the UK for around 4% to 5%.
Generally, 125% mortgage loans will be charged at a higher interest rate than standard mortgages, because of the unsecured component and the higher risk involved.
Different lenders will offer different packages. Some may charge a fee for taking out the loan, others may charge no fee but instead have a slightly higher interest rate.
The key thing is to shop around, do your research on the Internet and find the lender/loan combination that is right for you.
Who provides these loans?
125% secured loans are a lot harder to find now than they were a few years ago before the whole sub-prime fiasco led to a global credit crisis. So any list of lenders I give you here might be out of date by the time you read this. Also, it depends very much where you are. The US has a very different credit and borrowing landscape to the UK for example. So again, the best advice is to shop around and always go with a reputable, regulated lender.
What happens if I default on the payments?
As with any secured loan, if you don’t keep up the payments, your home and property will be at risk. A 125% secured loan is no different in this respect. If you fall behind with the payments, you might be given a couple of months’ grace period, but unless you can show that you will be able to catch up, the lender will instigate proceedings to foreclose on your property. So the best advice here is to keep up with your monthly payments and never borrow more than you can afford to safely pay back.
If you lose your job or other circumstances occur that drastically reduce your income, sometimes the best option is to sell your property sooner rather than later, while things are still under your control. This is always a better option than going through a repossession.
Can I get a 125% secured loan if I have bad credit?
The short answer here is yes, you can. But it will be a lot tougher finding a lender who wants to take you on, particularly in the wake of the sub-prime crisis.
A lot will depend on your credit history and your current credit score. If you can show that your credit score is moving in the right direction, you stand a much better chance of getting a loan.
How do I apply?
Generally, it’s a fairly simple process. Some lenders will allow you to go through the whole application process online, others will require a telephone interview and others will want you to meet a “financial advisor” in person.
You will need to show a current valuation of the property, proof of earnings, details of your current monthly outgoing expenses, employment records and history, bank statements, etc.
Conclusion
125% secured loans can be very useful things, but they are not for everyone. Think very carefully before you apply. Do you really need to borrow 125% of the value of your home? If so, make sure you are comfortable with the monthly repayments.