Homeowner loans allow you to borrow money against your property. You can often borrow more than you could with a personal loan and repayments may be more affordable. However, unlike a personal loan, the catch is that your home is at risk if you can’t keep up with repayments. Read on to learn when a homeowner loan is suitable, the risks you need to be mindful of, and the alternatives to consider before borrowing any money.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
A homeowner loan is a type of secured borrowing. When you borrow money, you put up your property as collateral. This means that if you fail to make repayments on time and in full, the lender can repossess your home. This makes lending you money less risky for the bank or building society, because they have a clear way to recoup any losses. In return, they should offer you better rates meaning borrowing is cheaper. However, it’s riskier for you, because if something goes wrong and you can’t afford your debts, you could lose your home.
To apply for a homeowner loan you need to be a homeowner, or hold some equity in a property. This is because homeowner loans are secured loans, with the lender using your property as security for the loan. If you aren’t able to make repayments, your lender could repossess your home to get its money back.
You don’t have to own your home outright to get a homeowner loan, however the amount of equity you have in your property will determine the amount you can borrow.
A secured loan is one where the money you borrow is secured against an asset. This could be your home, but could also be any high value object such as a boat, jewellery, a watch, shares, guitars or a car. Lenders like secured loans, because if you fail to make repayments, they can seize the asset and sell it to get back what they owe. It’s more risky for you though, because you could lose the asset entirely. This could mean you lose a treasured possession, are left without a means of transport, or even find yourself homeless. However, secured loans typically have far better interest rates than unsecured loans. That means you pay less overall to borrow the money.
Another advantage is that a secured loan allows you to borrow more money for longer than with most personal loans. This can be useful if you need access to a large sum of cash, for instance for property improvements.
If you choose to go ahead with a secured loan, make sure you have a cast-iron repayment plan. Think carefully about what would happen if you lost your job or became too unwell to work.
Lenders currently offer loans of between £1,000 and £2.5 million, but how much you can borrow will depend on a number of factors, including:
The value of your property
Your credit record
Your age and loan term
The amount of equity you have in the property
All homeowner loans set a maximum loan to value. This is the amount of money they will lend you, expressed as a percentage of the equity you own.
So, if you have £300,000 equity and you wanted to borrow £180,000 that would be a LTV of 60%.
If you have a mortgage on your property remember to deduct the outstanding balance first to get your LTV.
For example, if your home is worth £300,000 but you have £60,000 outstanding on your mortgage, you will have £240,000 in equity. To borrow £180,000 the LTV would be 75%.
You can spend your loan how you wish.
One of the most common uses of homeowner loans is funding home improvements. This could be anything from a new kitchen or bathroom to larger scale renovations.
Homeowners loans are also often used to consolidate debts. By rolling all of your debts into one loan you may be able to reduce the amount of interest you pay, or make repayments more affordable. However, while this may save you money and simplify your finances, it's important to keep in mind the risk you're taking with your home.
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 - the more equity you have in your home, the larger the loan you can get)
You have to pay interest for the duration of the loan term
You have to pass a credit and affordability check
Your home is used as security so you will be putting it at risk if you can’t keep up with repayments
Homeowner loans use your property as security. You can use almost any type of property as your security, including;
Like all loans, the cost of a homeowner is determined by the interest rate, but you also need to watch out for any fees charged on top of that.
Interest is charged for the duration of your loan and added automatically to your repayments.
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, fixed rates are much less common.
At the time of writing interest rates for homeowner loans were starting at just over 6%.
Not all secured loan lenders charge fees, but you need to check carefully so you know what you are paying. Fees to watch out for include:
Disbursement fees. e.g. land registry searches
The most important thing to consider is how you’ll repay your debts. Missing payments could mean you lose your house.
There are other considerations too. Most secured loans are only available through brokers, so to get the best loan you need to:
Decide how much you need to borrow: Work out exactly how much money you need. If it is less than £25,000, you could consider an unsecured loan.
Work out your loan to value: You will need an accurate valuation of your property to work out how much equity you have in your home..
Choose your loan term: Work out what monthly payments you can afford and estimate how long you need to pay back your loan.
Check your credit record: Make sure there are no mistakes on your credit report and see if you have a good, fair or poor credit rating.
Speak with a secured loan broker: They take your information and search the market for the best secured loan for your circumstances.
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.
If you want to move home but have an outstanding secured loan you have three options:
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.
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.
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.
If you have a good credit score and are borrowing less than £25,000 it’s worth considering an unsecured loan, such as a personal loan. Repayments may be higher but by paying the money back over a shorter period, your overall costs may be lower.
For larger sums you can also consider remortgaging your existing mortgage to raise money. This involves taking out a new, larger mortgage with either your current or a new lender. You pay your old mortgage off and take the surplus as cash.
Whether or not this makes sense will depend on your circumstances, available interest rates and the term you need to pay off the loan.
it’s easier to get homeowner loans with poor credit than it is to get many personal loans. However, as with all forms of borrowing your credit record is an important part of the lending decision so if you do have bad credit you may have to pay more for your loan or be limited in the amount you can borrow.
Home equity is the value or portion of your property that you truly own. If you own your home outright you will have 100% of the equity in your home, but if you still have a mortgage the proportion will be lower. An easy way to work out how much equity you have in your property is to subtract the amount you have left on your mortgage from its current market value.
Yes, but you will need to have enough equity in your home to meet the lender's criteria.
Yes but you may need to pay an early repayment or early redemption charge. Fees may vary so if you think you may want to repay your loan early it's worth checking what charges you will pay before you apply.
A payment holiday enables you to skip your loan repayments for a brief period of time. This can give you some flexibility but it increases your total loan repayment time and the amount of interest you pay overall. Whether or not homeowner loans allow payment holidays depends on the loan. If you think you may need this flexibility it’s worth checking whether it's available before you apply.
You can usually get a decision on your loan within a few minutes. Most lenders can then complete the application within two weeks.
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 more affordable. If you only need to borrow a smaller sum and can afford to repay it within five or so years, a personal loan may be better value and lower risk.
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.