What is a homeowner loan?

Homeowner loans enable you to borrow money, using your home as security. Find out whether it’s a sensible way for you to raise money and the factors you will need to consider before taking one out.

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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.

If you want to take out a loan, you can take out a second mortgage on your property with a homeowner loan. 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.

Our award winning broker can guide you through the process, tailor searches to suit your needs and help you find the right loan.

How do homeowner loans work?

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. 

What is home equity?

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. 

Let’s say you purchase a house for £200,000. You put down a 20 percent deposit, worth  £40,000, and take out a mortgage to cover the remaining £160,000. In this case you would  have £40,000 equity in your home.

However over time the equity in your home will grow as you continue to repay your mortgage and as its value (hopefully) increases.

This means that once you have owned your home for a reasonable number of years and have kept up with mortgage repayments, you are likely to have much more equity in it than you did when you originally bought it.

The more equity you have in your home, the more you will be able to borrow with a homeowner loan.

How much can you borrow with a homeowner loan?

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 income

  • 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%.

What can you use a homeowner loan for?

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.

What are the main features of a homeowner loan

  • 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

What are secured and unsecured loans?

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 do homeowner loans cost?

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

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%.

Fees

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:

  • Valuation fees

  • Legal fees

  • Disbursement fees. e.g. land registry searches

  • Broker fees

Getting the best homeowner loan

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.

Can I get a homeowner loan with bad credit?

Yes. As homeowner loans are secured to your property, 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.

What happens after you've applied for a homeowner loan?

Once you've chosen a lender and applied for a loan, the lender will carry out a number of checks before it approves your application. Checks  include:

  • Your credit record

  • Your income and recent payslips

  • The housing registry to confirm you own the property

  • The value of your property

  • The amount of equity you have in your property 

The loan application 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.

What if you want to move house?

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.

How to manage your loan

Are there any alternatives to homeowner loans?

If you have a good credit score and are borrowing less than £25,000 it’s worth considering 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. 

Remortgaging can be costly if there is an early repayment charge and may not be possible if your credit record has worsened or your financial situation changed since you took out your mortgage. It also means that you need to borrow the extra money over the same term as your mortgage. This can mean you pay more interest than you would with a shorter term on a seperate loan.

Homeowner loans FAQ

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