What is a homeowner loan?
A secured homeowner loan allows you to borrow a lump sum of money against your property. It means the loan is secured for the lender, and they could repossess your home if you’re unable to pay back the debt. They’re sometimes known as home equity loans, second mortgages or second charge mortgages.
You’ll need to make regular monthly repayments throughout the term of the loan, which could last anywhere between 1 to 35 years. If you don’t make the repayments, your home could be repossessed to pay off the outstanding debt.
It’s also worth noting that some homeowner loans charge an arrangement fee and may have other set-up costs.
With a secured homeowner loan:
- You can borrow against the value of your property up to a set percentage
- For the duration of the loan term you’ll have to pay interest
- You’ll need to pass credit and affordability checks to qualify for a homeowner loan
Our loan comparison service lets you compare loans up to £500,000.
What is a secured loan?
A secured loan is a loan that’s secured against an asset. The asset needs to be something you own, and this is known as “collateral”. The collateral required may vary, depending on the amount you’re looking to borrow, because it needs to be enough to cover the loan amount. Common examples include your car or home. You need to be careful when taking out a secured loan, because failure to keep up with your repayments could see the loan provider repossess the collateral you offered. An unsecured loan doesn’t require collateral.
However, a secured loan usually allows you to borrow a larger amount, often much more than the £10,000 limit associated with unsecured loans. This means you could use your secured loan for things like major home renovations or buying a second property. Secured loans also tend to offer lower interest rates and longer loan terms, because the loan provider has your collateral to reduce the risk of their investment in you.
Who are homeowner loans suitable for?
This type of loan is generally for homeowners or mortgage payers who want to borrow a larger sum of money than they could with a standard personal loan.
Providers may want to see that you’ve built up equity in your home (you’ve paid off part of your mortgage or have a home that’s increased in value), so that you have funds available to pay off the loan and any outstanding mortgage debt, if you’re unable to make repayments.
If you want to use your home to raise funds, remortgaging is a possible alternative.
Why it’s important to consider how much money you need
Knowing how much you need to borrow will help you decide where best to find that extra cash injection.
- If you only need to borrow a small amount of money for a very short time, consider using your interest-free overdraft, if you have one. If not, it could be worth looking at different current accounts that offer this facility.
- Credit cards with 0% interest on purchases could be worth a look, particularly if you need to buy something specific. As long as you pay back what you owe within the interest-free period (and make at least the minimum monthly payments on time), you can be smug in the knowledge that the credit hasn’t cost you a single penny extra.
If you need a larger sum of money, a personal loan could be the answer. You can usually opt to borrow a minimum of £1,000, with upper limits depending on the lender. Most will lend you up to £25,000, although some may go as high as £50,000.
The best APRs (annual percentage rate – this is the amount of interest, plus any fees, you pay on top of your loan) are reserved for customers with the best credit ratings. That’s why when you apply for a loan, you need to know that the APR you see might not be the one you get, unless it’s labelled as a guaranteed rate.
Frequently asked questions
What should I look out for when taking out a secured homeowner loan?
There are four things you need to understand before you take out this type of secured loan:
- If you fall behind or stop making payments on the loan, the lender could take you to court and your house could be repossessed and sold to repay the debt.
- This kind of loan could have a variable interest rate – so it can be difficult to budget your repayments, as the rate could go up or down as the market changes. And if you also have a variable rate mortgage, you could get hit twice if rates go up. So it’s important to make sure you’d be able to afford your monthly repayments if they were to increase.
- Some lenders make it hard to pay back secured loans – for example, by imposing a penalty if you try to repay the loan early.
- Some lenders won’t allow a ‘repayment holiday’ – which is where you can request a break of a month or two if you have financial issues.
What is a typical variable rate for a homeowner loan?
Because a variable rate is exactly that, there is no “typical” rate for a homeowner loan of that type. With a variable rate deal, the amount of interest you pay can change during your loan term. Any fluctuations will depend on the Bank of England’s base rate, which is impacted by the general state of the economy. While a variable rate is subject to change, you shouldn’t expect it to change every month, but it’s a good idea to keep an eye on it, as any changes will affect your monthly repayments; for better or worse.
How much could I borrow with a homeowner loan?
Homeowner loans tend to be used by people who need to borrow larger sums of money – typically between £10,000 and £500,000. They’re also usually paid back over a fairly long term, often between five and 25 years. You can use Compare the Market to compare secured loans up to £500,000, but how much you can borrow will depend on:
- the value of your property
- your income
- your credit history
- your age
- the loan term (length of the loan).
All lenders offering homeowner loans set a maximum loan-to-value ratio. This is the amount you’ll be able to borrow, based on the value of your property. Generally, the more equity you have, the more you should be able to borrow. If you don’t have much equity in your home, the amount you can borrow will be limited.
What is home equity?
Home equity is the difference between the current market value of your property and how much you still owe on the mortgage. In a nutshell, it’s the proportion of your property you own outright.
For example, say you bought a house for £200,000 and your outstanding mortgage balance is £120,000. That means your home equity is £80,000.
When you apply for a homeowner loan, the lender will look at how much equity you have in your home. This will help to determine how much you’ll be able to borrow and the interest rate you’ll be offered.
What fees might I need to pay for a homeowner loan?
Some lenders will charge fees as part of your loan agreement, so you’ll need to take these into account when you’re budgeting. They might include:
- an arrangement fee for setting up the second mortgage
- a valuation fee, because the loan is secured by your property
- a broker fee, which can be up to 10% of the loan value
- an early repayment charge if you pay off your loan ahead of the term end date, since your lender won’t be earning the interest they expected.
Does the broker fee impact your homeowner loan?
If you go through a broker, a broker fee could be part of the overall cost of your loan. The cost of the broker fee will vary between who’s brokering the loan for you, but you should look out for this before choosing a loan. However, a broker fee won’t actually form part of your loan. This is a separate payment you make to the broker that’s helping you. The broker is a third-party, so they’re not responsible for the loan you’re taking out, they’re just there to help you find a better deal, taking a commission or fee for doing so.
What does ‘total amount payable’ mean with a homeowner loan?
This shows you how much you’ll end up paying back over the full term of the loan. For example, paying back a £30,000 loan over 15 years might cost you more than £40,000. But if you paid it back over five years, you might only pay £33,500.
So it’s best to find a balance between affordable payments and a short repayment period, to avoid paying more interest than you need to.
Can you get an unsecured homeowner loan?
Generally, a homeowner loan is secured against the property you own, which is why they offer access to larger amounts for borrowing. However, some loan providers will offer unsecured homeowner loans, but they come in the form of a guarantor loan.
A guarantor loan is “guaranteed” by someone else, who must take responsibility for repaying the loan, if you’re unable to pay it back. Your guarantor can be a friend or family member, but you both need to be really sure about making this commitment. Your guarantor will need to ensure they have the money available to make your repayments for you, should you fail to keep up with them.
Can I get a homeowner loan if I have a bad credit history?
If you have a poor credit history, it can be tough to find a lender that will accept you. And if you’ve got into difficulty with debt before, it might not be sensible to get a loan at all.
That said, a poor credit history doesn’t necessarily mean you can’t get a loan. Our loan tables have a number of providers that say they will ‘consider applicants with poor credit’.
So if you’re looking for homeowner loans, we can help you find a loan to meet your needs.
Remember, though, that no matter how low the APRC, loans always come with cost and risk – especially where your home’s involved. Tightening your belt and saving up is a far better option, if you can. If you have debts, it’s worth seeking out free debt advice before you decide to take on a homeowner loan.
How can I find a great homeowner loan for me?
It’s easy to compare different kinds of loans with our handy comparison service. Take a look at our tables for the amount you want to borrow and start comparing.
Simply tell us:
- how much you want to borrow
- how much you can pay back each month
- how long you’d like to repay for
You’ll then see a table listing all potential options. No need to enter your personal details.
Results will be listed in order of lowest APRC (Annual Percentage Rate of Charge) first, which is the total amount the loan will cost you – including interest and charges.
How much does a homeowner loan cost?
The rate of interest you’ll be charged varies according to the size and duration of the loan, along with the value of the property you’re taking the loan out against.
Longer term loans might attract lower interest rates, but be sure to take into account the overall cost as you’ll be paying back the loan amount for longer.
Bear in mind that if you have a poor credit record, you’ll be charged a higher interest rate or you may even be refused for a homeowner loan.
Secured loans and credit score
With any type of loan, your credit score can affect the amount you’re able to borrow, as well as the interest rates and loan terms you’ll have access to. Having a poor credit history might mean you have access to less money for borrowing, or are charged higher interest rates, as the loan provider wants to mitigate any risk you might pose.
With a secured loan, your credit score could be less of an issue. This is because you’re offering something as collateral to secure the loan against. With a homeowner loan, you secure the loan against your home. However, this doesn’t mean your credit score is irrelevant, as a good credit score can still help you access more money and lower interest rates.
It’s a two-way street though. Your credit score affects the loan you get, but your loan could also then affect your credit rating. If you miss any monthly payments on your secured loan, your credit score is likely to suffer, whereas making an early repayment could improve it further. Keep on top of your monthly instalments during your repayment period, and you shouldn’t have anything to worry about.
What do I need to compare loans?
It’s quick and easy to compare different types of loans with our comparison service.
We’ll show you which loans might be available to you, once you’ve given us a few details about:
- how much you want to borrow
- over what period of time
- how much you can afford to pay back each month
You’ll see a table listing all the options and the representative rate of each, with the total amount payable, so you can compare lenders quickly and easily.
Paying off your homeowner loan
While it’s great that you can access a large amount of money with a homeowner loan, you’ll quickly need to start paying it back. Here are some things to think about when paying off your homeowner loan:
- Don’t miss your repayments – missing your monthly payments will not only have a negative impact on your credit score, but they could even lead to your home being repossessed, because your home is secured against the loan. If you think you’re in danger of missing a repayment, speak to your loan provider as soon as possible, to see if you can make an arrangement. Don’t just let it happen, as there might be something you can do.
- Budget carefully – if you know that you’ve got a new monthly expense to keep track of, you’ll need to budget for it every month. So, whether it’s rethinking that summer holiday, or perhaps enjoying a few less meals out, make sure you prioritise your loan repayments, otherwise it could cost you a lot more.
- Pay it back early (if you can) – if you come into some extra money during your repayment period, consider paying off your homeowner loan early. While you’ll want to look out for any early repayment charges, paying your loan off early could save you hundreds, even thousands, over the course of your original repayment period.
From the Money team
What our expert says
“A homeowner loan is a big financial consideration. While the interest rates might be more favourable than with an unsecured loan, you face losing your home if you don’t keep up the repayments. You need to be confident you can pay on time every month, throughout the entire term of the loan – even if your personal circumstances change.”
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