How do they work?

A homeowner loan, sometimes called a home equity loan, takes the value of your property into consideration when you apply to borrow money.

They are a type of secured loan, and to apply you need to own a property for the loan to be listed against - this property is the lender's security.

If you do not pay back the loan the lender can sell your property to get the money back.

The main features of a homeowner loan are:

  • You can pay the loan back over 1 to 35 years

  • You can borrow up to a set percentage of the value of your property

  • You have to pay interest for the duration of the loan term

  • You have to pass a credit and affordability check

What can you use as security?

Homeowner loans use your property as security. You can use almost any type of property as your security, including;

  • Houses

  • Bungalows

  • Flats

  • Cottages

How much can you borrow?

Lenders currently offer loans of between 1,000 and 2.5 million, but how much you can borrow depends on the following:

  • Value of your property

  • Your income

  • Your credit record

  • Your age and loan term

All homeowner loans set a maximum loan to value, which is the amount of money they will lend depending on the value of your property.

For example, if your home is worth 300,000 and you wanted to borrow 180,000 that would be a LTV of 60%.

If you already have a mortgage you need to deduct the outstanding balance to get your LTV.

For example, your home is worth 300,000 but your mortgage balance is 60,000, leaving you with 240,000 in equity. To borrow 180,000 the LTV would be 75%.

How much does it cost?

The interest rate determines the main cost of your loan, but there are other fees and charges you need to watch out for.

Interest

Interest is charged for the duration of your loan and added automatically to your payments.

To get the cheapest loan you need to look for the lowest interest rate you can find.

The type of interest rate you choose has a bearing on the overall cost:

  • Variable interest rates could change over time but are normally a little cheaper to start with.

  • Fixed interest rates stay the same for the duration of your loan, but the initial rate may be slightly higher to start with.

Most lenders offer variable rates and fixed rates are much less common.

Fees

Not all secured loan lenders charge fees, but you need to check carefully so you do know what you are paying. Fees to watch out for include:

  • Valuation fees

  • Legal fees

  • Disbursement fees. e.g. land registry searches

  • Broker fees

Getting the best loan

Most secured loans are only available through a broker, so to get the best loan you need to:

  1. 1.

    Decide how much you need to borrow: Work out exactly what you need to borrow. If it is less than 25,000, you could consider an unsecured loan.

  2. 2.

    Work out your loan to value: You will need an accurate valuation of your property and to know the outstanding balance on your mortgage if you have one.

  3. 3.

    Choose your loan term: Work out what monthly payments you can afford and estimate how long you need to pay back your loan.

  4. 4.

    Check your credit record: Make sure there are no mistakes on your credit report and check if you have a good, fair or poor credit rating.

  5. 5.

    Speak with a secured loan broker: They take your information and search the market for the best secured loan for your circumstances.

What happens next?

After you have chosen a loan, the lender will do some checks before your funds are released, these include:

  • Checking your credit record

  • Checking your income and recent payslips

  • Checking the housing registry to confirm you own the property

  • Checking the value of your property and your equity

This process normally takes between 3-5 weeks after which the money will be transferred into your chosen bank account.

Paying back your loan

Most homeowner loans require you to pay monthly instalments by direct debit, but if you would prefer to pay using a different method speak to a broker before you apply.

Can you repay the loan early?

Yes, but you may have to pay an early redemption fee or early repayment charge.

Can you take a payment holiday?

This depends on your lender and the type of loan you choose.

If you do decide to take a payment holiday then it will increase the total cost of your loan because you are taking longer to pay back what you owe.

What if you want to move house?

If you want to move home but have an outstanding secured loan you have three options:

  1. 1.

    Transfer the loan to your new property: Some lenders will let you move your loan to your new property, but you usually have to pay a fee to do so.

  2. 2.

    Use the money from the sale to pay off the loan: Check this will leave you with enough money to buy your new property, or for a deposit on your new home.

  3. 3.

    Borrow money to pay off the loan: If selling up does not leave you with sufficient funds, you could borrow to pay off your loan, but this may affect your mortgage affordability.

Remember, if you choose to pay off your loan you may have to pay an early redemption charge.

Homeowner loan FAQs

Q

Can I use my home to get a loan if I have a mortgage?

A

Yes, but you will need to have enough equity in your home to meet the lender's criteria.

Q

How long will it take to get a secured loan?

A

You can usually get a decision on your loan within a few minutes. Most lenders can then complete the application within two weeks.

Q

Is a secured loan better than an unsecured loan?

A

No, they are just different. A secured loan puts your property at risk, but may allow you to borrow more, pay it back over a longer time or be cheaper.

Q

Can I lose my house if I don't pay on time?

A

Yes, but this would always be the last resort of any lender because it is expensive to repossess a property and sell it to get their money back.