Securing a loan against your home can be a great way to borrow substantial sums of money at comparatively low interest rates. Taking out a secured loan does come with a few restrictions. The biggest of these are considerations of how selling a home will impact your loan.
Sometimes, you can port a secured loan over to a new property upon selling your home. This is easier said than done, though, as you’ll need agreement from your loan provider and any mortgage lender on the new property. That’s a risk for two separate financial bodies.
You’ll likely need to pay off a secured loan in its entirety if you plan to sell your home. Thankfully, this does not necessarily mean finding more money in the immediate term. In most cases, you will be able to use the equity earned in the sale of your home to clear your debts. Just consider how this will impact how much equity you walk away with.
What we cover in this article:
Do I have to pay off my secured loan before selling my home?
You do not necessarily need to pay off a secured loan before selling a home, but it will make your life easier if you do. Unless you can port your secured loan onto a new property, you will need to factor the outstanding balance into your eventual sale.
An outstanding balance on a secured loan should be treated the same way as an outstanding mortgage balance – it is a sum of money that will eat into the equity you will receive after selling. If you hold a secured loan against a home, you should only look to move if you can settle the debt and still walk away with sufficient equity.
If you can pay the amount due on your secured loan in full, closing the balance, you can move forward without giving the lender a second thought. If you cannot repay the loan in full, then it may prove difficult to sell the property with the secured loan lenders consent.
Can I sell my home before the end of my mortgage term?
You can typically exit a mortgage before the end of the term, albeit this may come at a cost. Your lender may charge a fee, known as an early repayment charge.
This will usually be a percentage of the outstanding balance of your mortgage. Early repayment charges are common in the early years of a mortgage, especially during a fixed rate or discounted rate period.
How do I repay my secured loan early?
You can repay a secured loan early, but as with a mortgage, an exit fee may be payable. This will either be a percentage of the outstanding balance or a set number of months worth of interest.
Your first step to repaying a secured loan early is contacting the lender and asking for a settlement figure. This will be your total outstanding balance plus your exit fee (where one is payable).
Once you have this number, you will have a set time to settle the balance and close the account.
You can do this one of three ways.
- Repay the balance in full using your own funds. This is the best way to repay the balance of a secured loan, but unfortunately, it’s rarely an option. Most people would not take out a loan and accrue interest payments if they had money available in the first place.
- Borrow money from a family member or friend and use this to close the secured loan balance. This means you will enter a personal arrangement that stays off your credit file. If somebody is willing to gift you the money, so much the better. Either way, get something in writing that confirms the arrangement – you’ll need this for a mortgage application after moving.
- Take out an unsecured loan for the outstanding secured loan balance and close your original account. This will only be an option if you owe less than £25,000 and have an excellent credit score, and the interest rate will invariably be higher than your secured loan, but there will be no obligation to settle an unsecured loan before selling a property. Consider the impact that shouldering another substantial, unsecured debt may have on a mortgage application.
If you cannot clear the debt on your secured loan before selling your home, you could look at porting it to another property. That is a complicated procedure, though.
Can I move my secured loan to my new property?
Moving a secured loan from one property to another is known as porting. In theory, you can port the outstanding balance to a new property. The challenge arises when you need to find a mortgage lender willing to take this agreement on, even if the provider of your secured loan agrees to the arrangement.
A mortgage lender is more likely to agree to this if you can pay a substantial deposit and keep the loan to value low. Mortgage lenders base their decisions on risk, and if you fail to maintain the repayments on a secured loan, you will be at risk of repossession..
Whether porting is possible depends on your personal credit history, the sums you’ll be borrowing as a mortgage, and how much is outstanding on the loan – in terms of balance and repayment term. Possible reasons for porting to refused include:
- The new mortgage lender is not prepared to enter an agreement with a secured loan attached.
- You are attempting to remain with an existing mortgage lender, but they are not prepared to retain your custom. Perhaps you were late with payments in the past, or your age dictates that you will be carrying substantial debt past retirement.
- Your personal circumstances have changed (such as you are now self-employed where previously you were salaried), and you are now considered a higher-risk borrower.
- The property you are aiming to port the loan to is considered a risky asset.
- The two lenders aren’t willing to work together.
Discuss your options with a secured loan or mortgage broker. They will be able to quickly confirm if porting is a realistic proposition based on your personal circumstances.
Does a secured loan affect remortgaging?
Remortgaging means moving your mortgage from one lender to another while retaining the same property. This involves taking out an entirely new mortgage agreement, so the same restrictions apply as those that we just discussed – some lenders will not be willing to take you on while still carrying a secured loan.
Some specialist lenders will allow you to remortgage while a secured loan is attached to the property, but the debt will likely play a role in the terms you are offered.
An alternative approach could be to remortgage and borrow a higher sum, paying off the secured loan with these extra funds. Discuss this option with your secured loan broker, ensuring the interest rates and exit fees involved do not mean you’ll pay more in the longer term.
What if my house sells for less than my total borrowing?
If you wish to sell your property, calculate how much you owe to your mortgage lender and secured loan lender. The sale price must come to more than this. If not, your lenders will look for you to repay the difference personally.
You can either do this from savings, or by taking out another loan. An alternative would be to negotiate a reduced settlement figure with your mortgage and secured loan lender.