Newer version available

There is a newer version of this publication available:
Debt Advice Handbook 14th edition

Secured loan

• The legal position
• Special features
• Checklist for action

A secured loan (often known as a second mortgage) allows a homeowner to take out a (further) loan, using the property as security. The lender takes a legal charge on the property, with a similar right to repossess as the bank or building society holding the first charge on the property (in some cases, the creditor may also hold the first charge). If a property is repossessed and sold, the proceeds are distributed to meet the claims of secured lenders in the order in which loans were given.

**Alert: The FCA’s guidance on mortgages and coronavirus makes no reference to secured loans or ‘consumer credit back book mortgage contracts’. However, as most of these are regulated mortgage contracts and subject to the rules and guidance contained in the FCA’s Mortgage and Home Finance: Conduct of Business Sourcebook (MCOB) it seems safe to assume that the guidance on mortgages and coronavirus applies to them as well. This view is supported by the fact that paras 5.18–5.20 of the FCA’s tailored support guidance (published on 17 November 2020 outlining the support it expects lenders to provide to clients after 20 November 2020 and which supplements previous guidances) specifically addresses secured loans: see fca.org.uk/publication/finalised-guidance/mortgages-coronavirus-tailored-support-guidance.pdf.

The legal position

There are three categories of secured loans.

•Regulated mortgage contracts. A secured loan is a regulated mortgage contract if:
◦it was taken out by an individual (ie, someone acting as a consumer and not for business purposes);
◦it was either a regulated credit agreement when it was made or, if made on or after 21 March 2016, would otherwise have been a regulated credit agreement;
◦it is secured on residential property – ie, at least 40 per cent of the property is occupied (or intended to be occupied) as a residence (but not where a loan is secured on residential property and the borrower entered into the loan agreement wholly or predominantly for the purposes of a business carried on by her/him and s/he is not going to occupy any of the property).
•Regulated credit agreements. Unless it is exempt (see here), the agreement is a regulated credit agreement if the loan was for £25,000 or less (if taken out before 6 April 2008) or £15,000 or less (if taken out before 1 May 1998). If the agreement was made between 6 April 2008 and 21 March 2016, the agreement is regulated regardless of the amount (but see ‘consumer credit back book mortgage contracts’ here).
•Unregulated agreements, if neither of the above apply.

Note: the changes introduced by the European Commission Consumer Credit Directive to pre-contract information on here do not apply to secured loans.

Special features

Interest rates on secured loans with finance companies are much higher than those charged by building societies or banks for first mortgages. Loans are often repayable over a much shorter term than for first mortgages and this, together with higher interest rates, means it is an expensive form of borrowing.

Before 26 March 2016, there were special rules for entering into secured loans regulated by the Consumer Credit Act 1974. The borrower must be given a copy of the agreement, which must not be signed for seven days. S/he must then be sent a copy for signing and left for a further seven days. If the borrower does not sign, there is no agreement. The lender should not contact the prospective borrower during either of the seven-day ’thinking’ periods unless asked to do so. If these rules have not been followed, the loan is not enforceable without a court order.

Checklist for action

Advisers should take the following action.

•Consider whether emergency action is necessary (see Chapter 8).
•Check whether the agreement is enforceable under the Consumer Credit Act 1974.
•Assist the client to choose a strategy from Chapter 8, as this is a priority debt.