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A Guide to Homeowner Loans

A Guide to Homeowner Loans

Homeowner loans allow you to borrow large sums of money if you have sufficient equity in your property. But you’ll need to pay the money back as agreed or your home could be at risk of repossession. 

  • Homeowner loans are secured against your property — so you could lose your home if you fail to repay the debt.
  • Rates can be cheaper than for personal loans, but if you have a good credit rating you might be able to find a personal loan at about the same rate.
  • How much you can borrow and the interest rate will depend on how much equity you have in your property, your credit history and your personal circumstances.

What is a homeowner loan?

A homeowner loan offers a way of borrowing large sums of money, typically between £3,000 and £100,000.

The debt is secured on the borrower’s property. So this type of loan is only available to borrowers who either own their home outright, or have a mortgage with a chunk of equity left over.

If you don’t pay back the loan as agreed, the lender can ultimately take possession of your home and sell it to recoup the debt. This means homeowner loans can be very risky for the borrower.

Homeowner loans are sometimes called:

  • secured loans
  • second charge mortgages

How do homeowner loans work?

When you take out a homeowner loan, the lump sum will be paid into your bank account. You’ll then repay it each month, plus interest, for the duration of the term.

Homeowner loans are normally for amounts from £3,000 up to £100,000 or more, with repayment terms of up to 35 years.

Interest rates are normally variable. This means the interest you pay may fluctuate depending on the Bank of England base rate or other economic factors.

The amount you can borrow and the interest rate you’ll be offered will depend on:

·        your personal circumstances

·        the amount of equity in your property

·        your income

·        your credit score

·        what you intend to use the money for

What is equity?

Equity is the difference between the value of your home and the amount you owe on your mortgage plus any other debts secured on your home.

Homeowner loans will have a maximum total loan-to-value (LTV) percentage. For example, if your home is worth £100,000 and you have a £60,000 mortgage, your LTV will be 60%. If you take out a secured loan for £20,000, your total LTV will be 80%.

Because the loan depends on there being equity in your property, your home will need to be valued before your application for a homeowner loan is approved.

Is a homeowner loan right for me?

Because a homeowner loan is secured on your property, you can often get one if your credit history isn’t perfect. If you opt for an unsecured loan instead, you’ll need a better credit score.

Homeowner loans are generally seen as a last resort, because if you get into financial difficulty you can lose your home. This type of loan should never be taken out to fund unnecessary expenses such as a flash new car or a holiday. The lender may ask what you intend to use the money for. You should also avoid consolidating existing debt into a secured loan because you might end up paying more in interest over the longer term and it is not a good idea to move unsecured debt to secured debt because you could lose you home if you can’t keep up repayments.

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 and monthly repayments. This usually occurs when there is a change in general interest rates.

You should think carefully about whether an unsecured or secured loan is best for you. An unsecured loan is much less risky as the lender will not be able to repossess your home if you can’t repay the loan. 

Usually, you would only choose a secured loan instead of an unsecured loan if you need to borrow a large amount of money over a term of 10 years or more. For example, if you wanted to undertake major home improvements.

Whatever type of loan you go for, you should make sure you can afford the monthly payments throughout the term of the agreement.

Check your credit report

You can often get a homeowner loan with a poor credit score because the lender has the option to repossess your home if you fail to repay the debt.

However, it’s still a good idea to check your credit report before making an application for a homeowner loan. If your credit score is better than you expect, you may be eligible for an unsecured loan which is a safer option.

If you see any incorrect information on your credit report you can raise a dispute by selecting the ‘Raise a dispute’ option against the appropriate section of your credit report.

What are the risks of a homeowner loan?

The risks are high with a homeowner loan — you could lose your home if you don’t repay the loan.

When you take out a homeowner loan, the lender takes a legal interest — called a 'charge' — over your home. A legal 'charge' means the lender has a legal right to any proceeds from the sale of your home.

If you fail to repay the debt, the lender can force the sale of your home. In this situation, your main mortgage gets cleared in full before any money goes towards paying off the homeowner loan.

If your house doesn’t sell for enough for both lenders to be paid in full, the homeowner loan lender can pursue you for any shortfall.

So the risks of homeowner loans are massive. You can potentially lose your home — and still be pursued for the outstanding balanceon top of that.

So it’s vital to be sure you can afford the repayments when you take out a homeowner loan.

What is a homeowner loan cooling-off period?

Because this is a loan which is secured on your home there is quite a detailed application process to go through. As part of this you will be provided with key information about the loan and will have the opportunity to cancel if you decide not to proceed. 

How much does a homeowner loan cost?

Homeowner loans are usually cheaper than unsecured loans, but not always. So make sure you compare the different types of loan before making a decision.

The interest rate you are offered on a homeowner loan will depend on:

·        how much you want to borrow

·        the equity in your home

·        the term over which you will repay the debt

·        your credit score

Being rejected for a loan can make it harder to be accepted for credit in the future. So, when one lender says no, they often all do. TotallyMoney’s eligibility checker lets you know if you’ll be accepted — with no harm to your credit rating.

Interest rates for homeowner loans

Short-term fixed rate

With some homeowner loans the interest rate will be fixed for the first few years of the loan (typically one to five years). After that your repayments will revert to a variable rate, meaning the lender can increase the interest rate.

Fixed for term

Some homeowner loans have a fixed interest rate for the duration of the loan. This means you will know exactly how much your payments will be for the duration of the loan and can budget accordingly.

Variable rate

With a variable rate loan, the interest rate you pay may fluctuate. The lender might change it if the Bank of England changes the base rate or for another reason.

This means that your monthly repayments could increase during the loan term, so it’s a bit more risky. But homeowner loans have variable rates.

What to look out for?

What are early repayment penalties on a personal loan?

You might be charged early repayment penalties on your personal loan if you:

  • want to pay more off your loan each month than your set monthly payment
  • want to pay off the entire loan before the end of the term

Early repayment penalties normally amount to one or two months' interest. But some loan providers don't charge early repayment penalties at all. If you think you might be able to pay off your loan early, you should borrow from a provider that doesn’t charge early repayment fees.

How long does it take to get a homeowner loan?

Getting a homeowner loan can take longer than getting an unsecured loan.

Lenders have to comply with strict rules about having a loan secured on your property, whether you can afford the loan, and the way they treat people who get into financial difficulty.

This means that the lender will have to carry out affordability checks and ‘stress test’ your financial circumstances before agreeing to a homeowner loan.

You might have to provide evidence you can afford to pay back the loan.

The loan application process from application to receiving the funds can be up to six weeks depending on your lender. So it’s quicker than applying for a mortgage but slower than applying for an unsecured loan.

There may also be a fee to transfer the money to your account.

Will I get the interest rate advertised?

You might not necessarily be offered a loan at 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.

Do homeowner loans come with fees?

Some homeowner loans come with various fees. These might include:

·        an arrangement fee 

·        a valuation fee

·        a broker fee

·        early repayment charges

Your quotation should provide you with full information about any applicable fees and charges.

Shop around for the best deals

You should compare loan interest rates and terms from different lenders. You may also want to consider obtaining financial advice if you are thinking about borrowing a substantial sum.

If you have a good credit score you might be eligible for an unsecured loan at a competitive interest rate. This will be much less risky than taking out a homeowner loan as an unsecured loan is not secured on your property.

The interest rates on a homeowner loan may vary depending on how much you want to borrow. Think about the term you want to repay your loan over. The longer the term, the lower your monthly payments will be. But a longer term means you’ll end up paying more interest overall.

It’s important to check that you can afford to repay any loan you take out over the whole term. If you fail to make repayments it can affect your credit score.


Pros and Cons of homeowner loans

Pros

  • you can borrow larger amounts than with unsecured loans
  • interest rates are normally lower
  • repayment terms tend to be longer
  • you don’t need a perfect credit rating

Cons

  • you could lose your home if you fail to repay the loan
  • variable interest rates can make budgeting more difficult
  • longer repayment terms mean a bigger interest bill overall
  • there could be extra fees or penalty charges for early repayment

  **Think carefully before securing other debts against your home. Your home may be repossessed if you don’t keep up repayments on your mortgage or other debt secured on it.**

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