A secured loan could be just what you need, but consider some key factors before committing yourself to anything.
Timing can be very important when it comes to managing your finances, especially if you’re looking at further borrowing. Usually, this period after the holidays is seen as a time to play catch up with your finances, depending of course if you were able to be frugal during the Christmas period and new year (if you did, congrats to you). Now that January has been and gone and you’ve managed to assess your current finances, you may be wanting to look at your lending options — but is it a good time to do so?
In an uncertain economic climate that is now post-Brexit, you may have seen the news that interest rates have been held at 0.75 per cent, suggesting stability and less worry around economic growth. This could even lead to interest rates being cut, but nothing is certain, with economists suggesting the rates could increase over the next year. What this all means for those who want to apply for a loan is that with interest rates currently unchanged and with the possibility of them increasing, it could be a great time to apply while they are still low.
If you’re thinking of venturing onto the property market, you’ll be pleased to know that for first-time buyers the rates have fallen. According to MoneyFacts, the rates on a 95 per cent loan-to-value (LTV) two year and five year fixed rate mortgage have steadily dropped in the last 5 years, currently at 3.25 per cent and 3.56 per cent, respectively. This has dropped every year since being at 5.04 per cent and 5.27 per cent in February 2015. The reasons for the continuous drop in rates for this type of mortgage product is because of more competition, creating a more competitive environment between lenders; great news if buying your first home is on your to-do list for 2020.
For current mortgage holders, the news of the rate staying unchanged — when some thought it may reduce to 2013 levels — may have left them disappointed. It could still happen but for the time being, if you are on a variable rate, nothing has changed. Aside from the news about interest rates, there are many factors that need to be considered when looking at secured loans, and if you can consider them well, any time is a good time to apply.
If you have a mortgage, you may want to explore the options of taking out a homeowner loan against the value of your property. By doing so, you can open up higher amounts of lending that wouldn’t be possible otherwise, thanks to using your property as collateral. Many of your financial goals for the year can be achieved in this way, providing homeowners with an advantage, especially when applying through their existing mortgage provider. This isn’t always suitable for everyone as taking out further risk on your property may not sound like the best idea. However, it can be a very fruitful option if your job is secure, you have the affordability and you’re thinking of getting financing for a large value project or process. The best thing you can do is speak to your current mortgage provider to look at your options. They will be able to provide relevant advice and pointers to what’s best against your current circumstances.
Home Improvement Loans
If you have determined that your goal is to make improvements to your existing home rather than moving, your best option is a home improvement loan. Maybe, you haven’t even considered that the things you want from a new property could be implemented into your current one for much less of the cost of upheaval. However you look at it, making improvements to your current property, whether it’s a new kitchen, bathroom, conservatory, garage/loft conversion or garden project, can make a huge difference. Determining whether it’s a good time to do this really depends on your current affordability and whether it’s something you want to achieve this year or in the long term. Because of the large sums involved potentially with a home improvement loan, you want to ensure that you think it through fully before committing to this type of borrowing. Of course, if it’s because of an emergency situation such as repairs due to flooding, for example, you will want to find what’s available at the best rates quickly. Using comparison sites as well as speaking to your current mortgage provider will present you with a number of options to finance this ASAP.
Analysing the Trends
Whichever type of secured loan you may be thinking about, analysing the current trends can help to time your application. Whilst rates dropped for first-time buyers over the course of 2019, how can we predict if the same will happen this year? What are the other main factors that could influence mortgages and other secured borrowing in 2020? Looking in the right places can provide insight that can help you come to a decision.
One of the trends that could be seen this year is that of the way providers will lend to you. Ever since the financial crisis of 2008, lenders have changed the way they lend and have become much more cautious with what a buyer needs to provide to get the loan and mortgage they want. Most notably, deposit amounts and what someone could afford to borrow have been restricted — it’s a far cry from 0 per cent mortgages. However, the way in which lenders assess your affordability may become more relaxed throughout the course of the year. Last year, Barclays increased the value of what someone can borrow against their salary. Many lenders will only offer between 3-4x someone’s salary, but Barclays began offering 5x for someone earning £30,000 per year. This change in mortgage income rules could continue meaning good news for those who are struggling to save a suitable deposit and get a higher value mortgage.
Another trend that could help you save your monthly outgoings is longer-term mortgages, for example for up to 40 years. These lengths of mortgages have become increasingly common, meaning lower monthly repayments for those who apply. You could also see these options become applicable for older buyers with an upper age limit being increased.
Being Financially Prepared
Being fully prepared for taking on any secured borrowing will dictate if it’s a good time for you to apply. No matter how low-interest rates may get, this doesn’t mean a lot if you can’t afford the borrowing in the first place. You’ll always need to ensure your finances are in the best place before starting to search the market for the best rates. This goes beyond just knowing you have affordability each month.
By checking your current credit score you’ll straight away see if there is any chance a lender will consider you for secured borrowing. If it’s low or very bad, chances are very slim for any secured loan, not without high-interest charges anyway. If you haven’t already, you should check your credit report so that you can get to the bottom of the reasons why your credit score may be lower than expected. This way, you can start to build your score back up by making changes to help. You should, of course, make sure that you do not have any repayments on existing borrowing outstanding, otherwise, this will not look good to a lender checking your file. The same goes for available credit; if you already owe thousands through other lending products, this will affect your chances of getting the best secured loans.
You’ll need to audit your finances too, even if you have a good or excellent credit rating. It’s all very well being up-to-date with any existing borrowing and not having made lots of applications for credit recently if you are only just able to afford paying for everything. By fully looking at your current income and monthly outgoings and being realistic about those little spends you don’t feel have an impact, like buying lunch every day or that flat white habit, you can see exactly what you can afford. Hopefully, it makes for good reading that shows plenty of affordability you can work with. If not, then you’ll need to reconsider what you want to achieve this year.
It May Be a Good Time, But is it a Good Deal?
If you’ve worked out your affordability is great, your credit score is better than you thought and the available rates are better than ever, none of this matters if you then choose a secured loan product that works against you than for you. You do not want to apply for just any secured loan with any lender just because they’ll accept you, especially if it’s the first you’ve found. You shouldn’t necessarily choose the option with your existing provider either, unless it’s the best option for you. It may be convenient and easier to go with the lender you already deal with, but you may be missing out on better options. Shopping around and taking the time to find what’s available will help you make a more informed decision.
This is easier said than done of course and is all very well if you know all the terminology with different secured products. Thankfully, there are many websites available that can help break this down and show you the best lenders tailored to what you’re looking for. You need to be looking at the type of fixed-rate at the start of the loan. Are you happy with a 2-year fixed rate or maybe a 5-year? Is the interest charge competitive with other lenders? What are the penalty charges if payments are missed? These are just some of the questions you’ll need to consider. Because of the higher risks involved with a secured loan, you’ll need to fully consider all avenues. The last thing you want is to be in a position where you can’t afford what you have agreed to and have your home repossessed or other collateral such as a car used to pay it off. Assessing your situation is just as important as assessing the market.
There are no guarantees when it comes to judging the best time to get a secured loan. You can get a very good deal at any time of year of course, so it’s about being aware of things that will potentially affect you. You should focus on what you can save and what you can afford first and foremost, then you’ll hopefully be able to take advantage of great secured loans.