A Guide To Secured Loans & Homeowner Loans
A homeowner loan, often referred to as a secured loan, provides a means of borrowing bigger sums of capital (normally at least £15,000) by using your home’s collateral equity to guarantee repayment. Secured loans are designed for people who have poor or non-existent credit ratings, because banks only must take a minimal risk.
There are several providers of these loans, whose rates frequently change, and low interest rates are offered to draw in new customers. Typically, homeowner loans are paid back over a five to twenty-five year period, however longer loan terms might be available. Often, it is easier to obtain these loans compared to personal or car loans, because lenders know that they can always get their money back.
Loans for Home Improvement
Some people opt to use secured loans to pay for expenses related to home improvements and renovations. For instance, you may wish to increase the value of your house by constructing a conservatory or extension. Also, you could use the money for basic maintenance to make the property more pleasant and comfortable.
Borrowers tend to take this route if they want to leave their capital reserves in place for emergencies, or if they need to update their home but lack the necessary funds. Home improvement loan amounts vary greatly, based on the borrower’s credit file, the down payment size and the value of the home.
Things to Take Into Account With Secured Loans
Prior to applying for a secured loan, it is vital to gauge the affordability of the loan repayments. There can be many ramifications, if you do not keep up with your repayments. It all depends on how far you fall behind, and it could affect your credit rating and – more crucially – your home ownership.
Secured loans come in different forms, and your personal situation will govern the conditions of your agreement. The variables that lenders look at, when assessing your application for a loan, include your credit rating, your salary, the level of equity in your home, and your current credit commitments.
The rate of interest they offer will be based on your credit rating, and your home might be subject to repossession if you default on your repayments.
Categories of Secured Loans
It is important to choose the right loan for your circumstances to reduce the cost as much as possible. There are a few different secured loan categories available. These are as follows:
Fixed for Term Loans
With these agreements, you pay the same amount each month over the period of the loan. This offers you the benefit of stable repayments, and means that you can budget for your monthly expenses.
Fixed Rate Short Term Loans
With these deals, you pay a predetermined amount each month over the fixed rate short term period (typically between twelve months and five years). Then, your repayments change to the lender’s normal variable rate. This means that your payment amounts could increase or decrease.
Loans With Variable Rates
The interest on these types of loans can alter, based on market moves or changes to the base rate set by the Bank of England. As a result, your monthly payments – and the whole amount you pay back over the loan period – could rise or fall. If interest rates increase, you might have to repay considerably more than you expected, or – in a worst-case situation – end up defaulting on your repayments.
Failing to repay will damage your credit rating immediately, and letters from lenders informing you of overdue payments are frequently billed to you with interest, as a penalty. Happily, most legitimate lenders make less money from repossessing properties than having the debts repaid. If you might be unable to pay, or fall behind with your payments, tell the lender straightaway. Sometimes, they will agree to arrange a new schedule for repayments.
Additional Things to be Aware of With Secured & Homeowner Loans
Criteria for Qualification
Numerous loans have stringent qualification conditions, like residency and age (normally, you must be twenty-one to sixty-five years of age). Most of the time, you have to of lived in the UK for a few years, and have a stable income and current account.
Low Rates Advertised
Be cautious of headline grabbing rates. Legally, only fifty-one percent of successful loan applicants must be provided with these. Therefore, the remaining forty-nine percent could pay an alternative rate that is more costly, while others could be declined with a note entered on their credit history.
Capital Availability and Other Charges
Lenders might impose a charge for transfers performed on the same day. With standard transfers (normally a few working days), it is possible to avoid this charge. Read the conditions and terms carefully for other charges, like arrangement charges.
Penalties for Early Repayment
Certain lenders will penalize you if you pay back your loan early, to compensate for the interest they would have otherwise earned. The amount will vary, however it usually equates to a couple of months worth of interest, based on how soon you contact them.
Periods of Deferment
Some lenders provide ‘payment breaks’. Although these are useful during lean times, remember that you will carry on accruing interest, so the total repayment amount will rise.
Secured Loan Benefits
Unsecured loans are typically cheaper for individuals with fair to excellent credit scores; however, as the name implies, secured loans offer lenders collateral, and therefore most loan companies are willing to offer such loans to consumers even if their credit is poor.
Large Borrowing Possible
£35,000 is the maximum unsecured loan, but secured loans can be acquired in amounts up to £2m or even higher depending on the lender.
Secured lenders prefer lengthy loan terms, as arrangements of this type offset the initial setup cost of the loan, which can be quite expensive. Therefore, the duration of such loans is usually anywhere between five and 20 years. Unsecured lending, on the other hand, is generally one to seven years, and although longer loans are possible to lower the monthly repayments, they also significantly increase the total interest repaid, as outlined below:
Applying for a Secured Loan
A consumer with a current home mortgage can apply for a secured loan provided the person has enough equity in his or her property to cover the borrowed amount.
If the client co-owns his or her property with another person, or if the client has a spouse or is in a civil partnership, a joint application is required.
Advantages and Disadvantages
Secured loans for homeowner loans can be acquired in any amount between £5,000 upwards, making them a good choice for those who desire a substantial loan.
Even though total borrowing costs frequently work out higher than just the borrowed amount and the interest, the headline interest rate on most loans will fall somewhere between five and six percent.
An additional benefit is that it is easier for your client to repay the loan, as the monthly payments are fixed.
The amount a client personally borrows through a homeowner loan depends on the person’s income, existing credit commitments, overall credit score, and the amount of the property’s equity.
Therefore, although lenders may offer loans of up to £100,000, only a fraction of that may be available to consumers who have low credit scores, too many loans already, or not enough equity in their property.
Like personal loans, the interest rate provided by the lender varies from one borrower to the next, based on credit. Additional disadvantages include repossession of property if the borrower defaults on the repayments. For this reason, most consumers are motivated to pay in a timely manner.
Secured Loan Alternatives
A popular example of an alternative to a homeowner loan is an unsecured personal loan of up to £15,000, running for a length of five years. With this option, the consumer can avoid placing his or her dwelling in jeopardy, and the loan may also feature a lower interest rate.
Borrowing more than £15,000 may present difficulties, however, if the loan is not secured. Therefore, the best option for those looking to borrow a large amount of money is re-mortgaging to free up some cash. Mortgage rates for consumers with lots of equity can be as low as two percent.
Nevertheless, the downside includes the possibility of high initial fees and paying interest on the entire amount owed for a longer length of time.
1. Can a client who does not live on the property apply for a secured loan?
Yes, provided the person can prove the existence of a formal tenancy agreement.
2. How do secured loans work?
In simple terms, the borrower has a loan that is secured against his or her property’s equity. He or she is required to make regular repayments until the initial amount borrowed, as well as the accrued interest, is paid off.
3. For Whom is a Secured Loan the Best Option?
Secured loans are not associated with upfront fees, and are usually more flexible for those on benefits only or pension incomes, or who reside in ex-council houses.
4. Self-employed clients without accounts
Affordability checks have become tougher than ever before, and many banks now require as many as three years of accounts for income proof. However, certain secured lenders on the Clever Lending panel accept an accountant’s reference, tax return or bank statement as proof of income.
5. The client has a complicated credit profile
Secured loans are quite flexible about eligibility, and therefore they are a good alternative for clients who have had problems in the past acquiring credit. Even those with missed payments or defaults on their credit history may find the solution is a secured loan from Clever Lending.
6. The client wants to retain his or her current mortgage arrangement
The client may prefer to retain a current low or fixed mortgage that was previously acquired. Opting for a secured loan is one avenue through which to keep the current rate stable, whilst simultaneously raising capital.
7. The client does not have enough equity for a re-mortgage
The client may discover there are limited LTV (Loan to Value) lending alternatives available. Therefore, if he or she has little or no equity, the preferred choice may be a secured loan. Clever Lending can assist individuals to identify possible alternatives if this is the case.
Like financial products like bank accounts and credit cards, secured loan deals vary greatly. Thoroughly researching the different loans on offer, instead of applying for the first advert you see, will improve your chances of paying a smaller amount of interest.
There are several free price comparison websites for secured loans, where you can input your property and credit information to see the most affordable lenders. This facilitates the process of locating the best deal for your situation considerably.
For a home improvement loan, you should ensure that the renovations will add utility and value to your property. If you need to borrow more than the likely market value of your house, this could be a poor financial decision.
Make use of comparable listings and other property resources to determine the value of your house before and after the updates. It can be useful to create separate home improvement lists, to differentiate the things that you must do from the things you want to do.