What is a Homeowner Loan?
A homeowner loan offers a way of borrowing large sums, typically between £3,000 and £100,000. It is only available to borrowers who either own their home outright, or have a mortgage with a chunk of equity.
Repayments are typically made over a period of five to 20 years and the interest rate can vary. The key here is that your property is used to guarantee payments. This means that if you miss repayments, your home could be repossessed and sold to repay the debt.
Why Should I Be Cautious?
Homeowner loans are generally seen as a last resort, because if you get into financial difficulty you can lose your home. They should never be taken out to fund unnecessary expenses such as a flash new car or holiday. As repayments are usually spread over a long period of time, monthly payments can be low but the total amount of interest paid can be very high.
Unlike unsecured loans, your interest rate is not usually fixed, meaning the lender can increase your APR whenever they like.
When Should I Consider a Homeowner Loan?
- If you have a poor credit history – Homeowner loans can be easier to access than unsecured loans, which make them a good option for those with poor credit histories. This is because the lender is taking less risk, since they can recover their money by repossessing your home if you fail to pay up.
- If you want to consolidate existing debts by repaying your old debts with a loan at a lower interest rate, which reduces monthly repayments and the amount of interest paid overall.
- However, be aware that many loans have penalties if you repay them early. Contact a free debt charity such as Step Change or National Debtline for advice before consolidating debt.
Can I Afford It?
Always borrow as little as possible, for the shortest time possible. This will ensure you pay the minimum amount of interest. Remember the longer you spread the debt, the more interest you will pay. Think carefully about how much you could afford to pay per month.
For example, if you borrow £100,000 over 20 years at 5.7% interest, you will pay back £693.22 per month. This makes the total interest £66,373 assuming the interest rate stays the same – which it might not. TotallyMoney’s loan comparison service allows you to compare different loan amounts, as well as different repayment periods, to reveal the difference in monthly payments. This should help you to decide how much you can afford to borrow, and over what period of time.
You should also consider how your circumstances and budget may have changed in ten or twenty years time – will you still be able to afford the repayments? Never, ever borrow more than you absolutely need.
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What Interest Rate Will I Pay?
The interest rate you are offered on a loan will depend on your credit history. It may not necessarily be the interest rate advertised by the bank or building society. Only 51% of successful applicants are offered the ‘representative’ APR. The rest will be offered a higher interest rate, and others will simply be rejected.
Unfortunately, you normally don’t know what interest rate you will be offered until you apply for the loan. And applying for lots of loans can damage your credit rating, because banks don’t like to see that you’ve been rejected several times.
The good news is that TotallyMoney.com’s personalised credit comparison toolservice will tell you if you’re likely to be accepted for a homeowner loan BEFORE applying. It carries out a ‘soft search’ of your credit data that will NOT leave a mark on your credit file. Our advanced credit matching technology then compares a wide selection of loan providers to give you a broad choice. This means you will only apply for secured homeowner loans that you know you’re likely to get.
Do I have Enough Equity?
You can normally only borrow as much equity as you have in your home. Equity refers to the proportion of your home that you own outright, without a mortgage. For example, if your home is worth £150,000 and your outstanding mortgage is £50,000, then you have £100,000 of equity.
Pros and Cons
Homeowner loans can be a great option for some people, especially those who:
- Need to borrow £10,000s.
- May struggle to get credit elsewhere.
- Can afford the monthly repayments.
But borrowers should remember:
- Your home is at risk if you cannot keep up repayments.
- Your monthly repayments can go up.
- You may be charged a penalty if you try to repay your loan early.