What happens to my secured loan if my collateral decreases in value?
13th February 2026
By Simon Carr
A secured loan uses an asset, typically property, as collateral. If the value of this collateral decreases, it increases the lender’s risk exposure by raising the Loan-to-Value (LTV) ratio. While a short-term dip may not immediately affect the status of your loan, significant or prolonged value decreases could trigger specific clauses within your loan agreement, potentially requiring you to provide extra security, repay a portion of the principal, or renegotiate the terms.
What Happens to My Secured Loan if My Collateral Decreases in Value?
Secured loans in the UK are typically backed by high-value assets, most commonly residential or commercial property. The fundamental premise of a secured loan is that if the borrower defaults on their repayments, the lender has the legal right to seize and sell the collateral to recover the outstanding debt. The relationship between the loan amount and the asset’s value is crucial; therefore, any significant reduction in the value of the collateral requires careful consideration from both the borrower and the lender.
Understanding the Loan-to-Value (LTV) Ratio
The core measure affected by a decrease in collateral value is the Loan-to-Value (LTV) ratio. This ratio expresses the size of your loan as a percentage of the collateral’s current valuation.
For example, if you borrow £150,000 secured against a property valued at £250,000, your initial LTV is 60%. If the property value later decreases to £200,000, the LTV instantly rises to 75% (£150,000 / £200,000). This higher ratio indicates a thinner margin of safety for the lender.
- Lower LTV: Indicates lower risk for the lender and often results in better interest rates for the borrower.
- Higher LTV: Indicates higher risk. Lenders become concerned when LTV approaches 90% or 100%, as they may struggle to recoup costs if the property needs to be sold.
Immediate Impact: Monitoring and Review Clauses
In many standard residential second charge mortgages, minor fluctuations in property prices do not trigger immediate action, provided the borrower continues to meet their contractual repayment obligations. However, specialised finance, such as bridging loans, commercial mortgages, or high-value secured borrowing, often includes specific clauses detailing what action can be taken if the collateral’s valuation drops below a pre-determined threshold.
1. Increased Interest Rates or Fees
Some loan agreements include provisions that allow the lender to adjust the interest rate if the risk profile changes significantly. If the LTV moves into a higher risk band due to falling property prices, the lender may be entitled to increase the interest rate to compensate for the higher exposure.
2. The Possibility of a Margin Call
A “margin call” is a term more common in commercial and investment lending, but it is relevant when discussing specialised secured finance. If the terms of your loan specify a maximum acceptable LTV (e.g., 70%), and a new valuation shows that the ratio has risen above that level (e.g., 75%), the lender may issue a margin call.
This demands that the borrower take action to restore the LTV to the agreed limit. This is usually achieved by:
- Repaying a portion of the loan principal immediately (a capital reduction).
- Providing additional collateral or security acceptable to the lender.
Failing to meet a margin call within the stipulated timeframe could be deemed a breach of contract and potentially lead to the loan being defaulted, even if all monthly payments have been made on time.
3. Loan Renegotiation or Refinancing Difficulties
When the original term of the secured loan ends, or if you attempt to switch providers, the lowered collateral value becomes highly relevant. If the collateral decrease has resulted in a high LTV, refinancing may become challenging, or you may only qualify for higher-cost products.
If you are exploring refinancing options or trying to understand the full extent of your debt position, reviewing your credit report is essential before speaking to lenders. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)
The Worst-Case Scenario: Negative Equity and Default Risk
While a decrease in collateral value alone is rarely grounds for a standard secured loan to be called in (unless specific margin call clauses apply), it drastically increases the risk if you encounter financial difficulties.
When the value of the property drops below the outstanding loan balance, the property is in negative equity. If the borrower must sell the property or is forced into default, the sale proceeds will not be enough to clear the debt. The remaining debt balance (the shortfall) would still be owed to the lender, potentially necessitating further legal action.
For UK homeowners struggling with secured debt, reliable, impartial advice is available. Understanding your rights and responsibilities when facing potential repossession or high LTV issues is crucial. Resources like the MoneyHelper service offer excellent guidance on dealing with mortgage and secured loan arrears.
Crucially, regardless of property value fluctuation, meeting your agreed repayments is the priority. Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession proceedings, increased interest rates, and additional charges added to the outstanding debt.
What Can You Do If Your Collateral Value Drops?
If you are concerned about what happens to my secured loan if my collateral decreases in value, taking proactive steps is always advisable.
1. Review Your Loan Agreement
Check the terms and conditions, particularly sections relating to ‘events of default’ and ‘covenants.’ Look for any clauses that mention revaluation triggers, required LTV thresholds, or the lender’s right to demand additional security based on the collateral’s value. This is especially important for bridging loans and commercial property finance.
2. Communicate with Your Lender
If you anticipate difficulties or are already aware of a significant drop in value, open dialogue with your lender early. They may be willing to temporarily waive strict compliance with LTV covenants or discuss alternative repayment plans, especially if you have a strong track record of repayment.
3. Increase Capital Repayments
If possible, making extra capital repayments will quickly reduce your outstanding debt balance, thereby lowering the LTV ratio and restoring the lender’s security buffer. This preemptive action can prevent the lender from invoking stricter clauses later on.
4. Seek Independent Financial Advice
If the secured asset is complex (e.g., development land or commercial buildings) or if the loan is structured finance, seeking advice from an independent financial advisor or a solicitor specialising in property finance is crucial. They can interpret the legal implications of the security shortfall and help negotiate a strategy.
For general debt advice, you can consult non-commercial sources for impartial guidance on dealing with secured debt issues. For example, Citizens Advice provides information on dealing with mortgage and secured loan problems: Get help with your mortgage or secured loan.
People also asked
Can a lender demand immediate repayment if property value drops?
This is highly dependent on the specific contract. Standard residential mortgages rarely allow for immediate full repayment based solely on collateral value decrease. However, specialised finance agreements often include covenants (conditions) that, if breached due to LTV increase, grant the lender the right to ‘call in’ the loan or demand immediate partial repayment (a margin call).
Does the collateral decrease affect my credit score?
A decrease in collateral value itself does not directly impact your personal credit score because credit reference agencies track your repayment behaviour, not the market value of your assets. However, if the collateral drop leads to you missing a margin call, defaulting on an agreement, or renegotiating the terms under duress, those consequences could severely affect your credit profile.
What is the difference between secured and unsecured loans regarding asset value?
Unsecured loans (like personal loans or credit cards) are not backed by collateral, so the borrower’s ability to repay is based purely on their income and credit history. Fluctuations in property or asset values have no bearing on an unsecured loan. For secured loans, the asset value is central to the risk assessment and loan structure.
How often are secured properties revalued by lenders?
The frequency of revaluation depends on the type of loan. Standard long-term mortgages are rarely revalued during the term unless refinancing. However, bridging loans and certain commercial finance products often require regular, sometimes quarterly or annual, valuations to ensure the LTV ratio remains within agreed covenants.
What if I am in negative equity but keep making all payments on time?
If you are in negative equity (the debt is higher than the property’s value) but continue to meet all contractual repayments, your loan remains in good standing. The negative equity primarily becomes a serious issue if you need to sell the property or if the loan agreement is nearing its end and refinancing is required.
Summary of Risks and Mitigation
If you hold a secured loan, particularly one linked to volatile commercial or investment property markets, the decline in collateral value shifts the financial balance of the agreement towards higher risk. The lender’s primary concern is always recouping their capital.
By understanding your loan covenants, proactively managing your debt level (reducing the principal where possible), and maintaining open communication with your lender, you can mitigate the consequences of what happens to my secured loan if my collateral decreases in value, ensuring that your financial commitments remain manageable and compliant.