By Matt Fernell, Editor-in-Chief at Finance.co.uk. Published 29th November 2023.
A homeowner loan is an effective way to access a large amount of money at an affordable rate, but they’re not without risk.
They allow you to borrow money by using your home as security. This means you can borrow larger amounts of money at potentially lower rates than personal loans, but your home will be at risk if you can’t keep up with your repayments.
When you take out a homeowner loan, your property acts as a safety net for the lender because if the worst happens and you cannot repay the loan, they can sell your home to get their money back.
This is why they can offer higher loan amounts and lower rates with homeowner loans. The risk to the lender is a lot lower than with an unsecured loan because no matter what happens, they can recover the money you borrowed.
To get a homeowner loan, you need to own your home and hold enough equity in the property to meet the lender’s criteria. To decide whether you’re eligible for a secured loan, lenders will look at:
Your affordability, based on your incomings and outgoings
Your credit rating
The value of your home
The amount of equity you have in your home
The lender will use this information to establish if you can get a secured loan and to work out how much you’ll be able to borrow.
What you can borrow will depend on your property's Loan-to-value ratio (LTV). You can work this out by dividing the amount left on your mortgage by your home’s value, then multiplying the result by 100.
For example, if you have £240,000 left to pay on a home worth £400,000, the LTV will be 60%. This means you hold 40% equity in the property. A secured loan lender may stipulate that the maximum LTV they’ll lend to is 80%, which means you could borrow another 20% of your property’s value, which would be £80,000.
What you can borrow will also determined by how much you can afford to repay each month. To assess your affordability, the lender might want to see evidence of your payslips and bank statements.
Once you receive your secured loan, you can use the money in any way you choose. Homeowner loans are generally used for things like:
Home improvements that add value to your property
Consolidating your debts into one manageable payment
A big one-off purchase like a new car
Funding a new business venture
The lender or broker may ask what you need the loan for during the application process. This information will only be used to help find the right borrowing option for you.
Homeowner loans can be a good way of accessing large sums of money if needed. However, there are big risks involved.
By securing the loan against your home, you’re running the risk of having it repossessed and sold. For this reason, it’s worth thinking carefully about whether a secured loan is the right option for you.
If you only need to borrow a relatively small amount, like £5,000 or £10,000, you might be able to do that with an unsecured personal loan.
These can come with higher interest rates, but crucially, your home will not be at risk if you fall behind on your repayments.
If you have a poor credit history, you might find it more challenging to get a loan. However, homeowner loans can be easier to be approved for because there is less risk to lenders.
If the worst happens and you can’t repay your loan, the lender can repossess your property and sell it to get their money back. This is why you can borrow more at a lower rate with a loan that’s secured against your property.
Getting a secured loan could actually help you improve your credit score if you make all of your repayments on time. However, only ever take out a secured homeowner loan if you’re confident you can afford the repayments, as your home will be at risk if you fall behind.
If you’re looking for a way to improve your credit score, getting a credit-building credit card could be a safer option.
There are several costs associated with secured loans. How much one could cost you will depend on things like:
The interest rate you're offered - this is the biggest cost of a homeowner loan
The amount you borrow - the bigger the loan, the more it will cost you in interest
Term of the loan - a longer term could mean lower repayments but paying more interest overall
Extra fees - you may need to pay a valuation fee or arrangement fee
Look at all the costs when you get quotes for a homeowner loan to help you find the best deal for you.
When looking for a homeowner loan, it’s a good idea to speak to a secured loan broker. They can search the whole market for you to find the best deal and talk you through everything you’ll need for your application.
Before you start getting quotes, there are a few things you need to know:
How much you want to borrow
How long you want to borrow the money over
How much your property is worth
How much you have remaining on your mortgage balance
With this information, a broker can start to work out if you’re eligible for a homeowner loan and find you quotes.
There are several ways to borrow money if you don’t want to use your home as collateral. These include:
An unsecured loan: This type of loan doesn’t need an asset as security, but they’re usually only available for up to £50,000, and the interest rates may be higher.
A purchase credit card: You can use a credit card if you only need to borrow a small amount. You will need to clear the balance quickly to avoid paying interest unless you can find a deal with a long 0% period.
Remortgage: If you have plenty of equity in your property, you could look to release some of that money by remortgaging to a new mortgage deal over a longer period of time.
Which option is right for you will depend on how much you want to borrow. If you need to borrow a large amount, a loan secured against an asset like your home may be your best option, especially if you have a poor credit score.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
