You could use your property to help you borrow money with a homeowner loan. Here is how they work and what you need to consider before getting one.
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.
Our award winning broker can guide you through the process, tailor searches to suit your needs and help you find the right loan.
To apply for a homeowner loan you need to be a homeowner, or hold equity in a property. This is because homeowner loans are secured loans that are secured against your property.
Home equity is the value of portion of a property that you truly own if you have a mortgage. An easy way to understand equity is subtract the amount you owe from the market value of your home.
Assume you purchased a house for £200,000. You put in a 20 percent down payment, which equals £40,000, and got a loan to cover the remaining $160,000. In this case your home equity is £40,000.
There are two ways you can increase the equity in your home.
By making your mortgage repayments.
When the value of your home increases
There are a number of reasons people may need to borrow a large amount of money.
One of the most common uses of homeowner loans, is for funding home improvements. This could in the form of improving your kitchen, or adding a conservatory to your home.
A homeowner loan can also be used to consolidate debts in order to lower the interest you pay on that debt. While this may allow you to save money and simplify your finances, it's important to keep in mind the risk your'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
You have to pay interest for the duration of the loan term
You have to pass a credit and affordability check
Homeowner loans use your property as security. You can use almost any type of property as your security, including;
Lenders currently offer loans of between £1,000 and £2.5 million, but how much you can borrow really depends on the following:
Value of your property
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%.
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 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.
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:
Disbursement fees. e.g. land registry searches
Most secured loans are only available through a broker, so to get the best loan you need to:
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.
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.
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 check 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.
Once you've chosen a lender and applied for the loan you want, the lender will then do some checks before you get your funds. 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.
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.
Yes, but you will need to have enough equity in your home to meet the lender's criteria.
Yes, but you may have to pay an early redemption fee or early repayment charge.
It 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.
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 cheaper.
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.
Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.