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 or second mortgages) are one such type of secured loan – but before you consider applying, there are all sorts of financial criteria you need to consider, as well as some industry small print to cover.
What is a homeowner loan?
A homeowner loan is a type of secured loan where the borrower’s property acts as the lender’s security. Simply put, the grounds of you getting your loan is based on the value of your property, so in the event that you don’t pay back your loan, the lender has the right to sell your property in order to get their money back.
Typically, this type of loan is available to people looking to borrow anything from £15,000 to £100,000 (although the current amount lenders can offer is up to £2.5 million) over a longer period of time – usually up to 25 years – with these figures likely to increase or decrease depending on your circumstances as the borrower, as well as the lender’s requirements.
To apply, you must own a property with equity (the difference between the property’s current value and any outstanding mortgage), as this is used as security for the lender – and the amount you’re able to borrow generally depends on a number of factors:
- The value of your property
- Your income
- Your credit record
- Your age
- Your chosen loan term
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.
Please note: 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.
Homeowner loan rates are also influenced by your credit history (with bad credit holders typically being charged more interest than those with a long history of responsible lending and timely repayments).
What to consider before applying:
- First and foremost, you have to pass a credit and affordability check – this is simply to make sure you’re in a stable financial position to be able 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. For example, if your house is worth £250,000 but your mortgage is £150,000, you have equity of £100,000
- You have to pay a predetermined annual percentage rate (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 25 years, depending on the lender or broker in question
All home equity loans available on the market set a maximum loan to value – this is the amount of money you’re able to lend based on the value of your property.
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 value 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.
The 3 types of homeowner loans:
- Short-term fixed rates – With this type of loan, you’ll pay a fixed amount of interest every month for a short period of time – usually 1 to 5 years. For the remainder of your repayment term, after the initial short-term period, your interest will then revert back to the lender’s standard variable rate – meaning that the monthly interest you pay back is likely to fluctuate
- Variable rates – Variable rate deals may fluctuate over time, depending on the Bank of England base rate – as a result, the total amount payable (the overall amount you pay back over the agreed term) could either increase or decrease
- Fixed for term rates – These types of interest rates remain at the same level for the duration of the loan, allowing you to budget your monthly outgoings effectively – 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
- Work out your LTV using an accurate valuation of your property and the outstanding mortgage (if you have one)
- 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 who are FCA-approved
What happens once you’ve chosen your loan?
After you’ve spent the time carefully selecting the right loan and provider for you, your chosen lender will do some final checks before releasing your funds. These will include:
- Checking your income and recent payslips, provided by yourself
- Looking at your credit record
- Making sure you are the property owner with the housing registry
- Confirming the value of your property and attached equity
Once these checks have been made, over a typical period of 3 to 5 weeks, the agreed amount will be transferred into your bank account. It’s then up to you to pay back the amount, usually on a monthly basis via direct debit – although if you’d prefer to pay using an alternative method, this is something that will have to be agreed with your lender or broker prior to you taking out the loan.
Can you move house and keep your loan?
If you have an outstanding secured loan but are looking to move house, you have 3 options:
- Move the loan across to your new property – this may incur a fee, though, so it’s worth enquiring with your loan provider before you do this
- Use the money you get from the sale to pay off your loan – before you do this, though, make sure this will leave you with enough money to put down a deposit on your new home
- Borrow the money needed to pay off the loan – if, once you’ve sold your property, you don’t have enough money to pay off your loan, you can then borrow the money needed to pay it back – although be aware that this might affect your mortgage affordability
For more information on 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.
Looking for additional help when it comes to managing your finances? Visit the Citizens Advice website here, or try calling the free national debt helpline on 0808 808 4000.