Using your property in order to increase your chances of securing a loan has become an increasingly popular personal finance option. Homeowner loans (otherwise known as home equity loans) are one such type of secured loan – but before you consider applying, there are all sorts of financial criteria you need to know, as well as some industry small print to cover.
To apply, the interested party must own a property, as this is used as security for the lender. It’s vitally important to remember and understand that, in the event you’re unable to repay your loan, the lender can then force you to sell your property in order to get the money back.
The main features of a homeowner loan are:
- First and foremost, you have to pass a credit and affordability check – this is simply to make sure you’re in a financial position to pay back your loan
- You can borrow up to a certain percentage of the value of your property – meaning the lender essentially takes over a part of your home’s equity (second charge), in addition to your existing mortgage lender (first charge)
- You have to pay a predetermined amount of interest (APR) for the duration of the loan, charged on top of your monthly repayments
- Repayment terms can typically range from a single year all the way up to 35 years, depending on the lender or broker in question
Any type of property can be used as security – houses, cottages, bungalows, flats – you name it. As long as it’s a property in your name, it’s eligible to be used as security for the lender.
It’s worth noting that many lenders do not accept a caravan as security for a homeowner loan. If this is a predicament you find yourself in, applying for an unsecured personal loan may be a more suitable alternative.
You can usually expect to be able to borrow anything between £15,000 and £100,000 as part of a secured homeowner loan
Homeowner loans can be of a greater value than unsecured loans, you can usually expect to be able to borrow anything between £15,000 and £100,000 as part of a secured homeowner loan – but the amount you’re able to borrow depends on a number of factors:
- The value of your property
- The equity you have in your property
- Your income
- Your credit record
- Your age and chosen loan term
Homeowner loan rates are also influenced by your credit history (with bad credit holders typically being charged more interest than those with a history of responsible borrowing and timely repayments).
All home equity loans available on the market set a maximum loan to value – this is the amount of money you’re able to borrow based on the value of your property. For example, if your home was worth £250,000 and you wanted to borrow £100,000, this would mean your LTV would be 40%.
Having a mortgage affects this figure, as your outstanding balance will need to be deducted from the value of your home – leaving you with the equity that the LTV is derived from.
Interest rates dictate how expensive your loan will be, and there are two primary options available to you, which have an effect on the overall cost of the loan. One of the main advantages of a secured homeowner loan over an unsecured loan is a lower interest rate. This is available because the equity in your property is held as security in case you can’t repay the loan meaning that the lender is taking less risk.
Fixed interest rates remain at the same level for the duration of the loan, but this may come at the cost of a higher initial rate.
It’s also highly recommended that you find out everything you can about any fees involved in your loan, as, for many people, finding the best homeowner loans for them can simply come down to the nature and number of additional fees involved. Examples include:
- Valuation fees
- Legal fees
- Disbursement fees – this could include land registry searches
- Broker fees
Finding the best homeowner loan for you
Looking through the range of loans available to find the best option for your unique needs and circumstances can be a tricky business, but there are a few crucial considerations that you can take into account in order to get the best possible deal.
- Know exactly how much you need to borrow – this is important, as borrowing an unnecessarily large amount could spell trouble in the future
- Check your credit record – make sure you know where you stand in terms of your credit score
- Estimate how long it will take you to repay the loan and what monthly payments you can comfortably afford in the long term
- Speak with a secured loan broker – always make sure you’re dealing with brokers and lenders that are FCA-approved
For further information regarding the available loan types and how to get your personal finances in order, explore our blog – where you can find top tips, guidance and more.