What is a homeowner loan?
This is a type of secured loan that allows you to borrow a sum of money against your property. It means that the loan is secured for the lender and they have the right to repossess your home, should there be any issues with the repayment. Rates are likely to be more attractive than a personal loan. However, remember that your property is at risk of being reclaimed, to help pay for any outstanding debt. The amount you are able to borrow, as well as the term and interest rate depends on home equity, credit history and personal circumstances.
Who can get one?
You will most likely need to have a decent credit history to qualify, although lenders are less focused on this in your application than they are for personal loans. The main reason for this is that they are given some certainty that the loan is going to be repaid as the borrowing is tied directly to your property.
How much can you borrow?
Currently, lenders are offering amounts from anywhere between £1,000 and £2.5 million, but ultimately the amount you can borrow depends on your personal circumstances. They consider the value of your property, your income, your credit history and your age/loan term. Homeowner loans have a maximum ‘loan to value’ (LTV), which is the amount of money they are willing to lend you based on the value of your property and lenders make their own decision on what LTV range they consider. You will often find that interest rates tend to be cheaper because of the secured nature of the loan. However, always remember that your home is at risk if you don’t keep up repayments on the loan. If you’re accepted, the money could take a few business days to reach your chosen account, although it will depend on the lender.
Choosing the best loan for you...
- Loan amount - Decide how much you need to borrow.
- Work out the loan to value - You will need an accurate valuation of your property and to calculate any outstanding balance you may have on your mortgage, if you have one. Lenders may wish to make a valuation of your property for themselves before confirming the loan to you although this may not require anybody to visit you.
- Loan term - Work out how much you can afford to pay in monthly instalments, then figure out how long it will take to repay the loan in total.
- Check your credit report - Check whether your rating is good / fair / poor and ensure there are no mistakes. If you don’t have access to this, visit Credit Knowledge, where you can see your personal, detailed credit report with a free no obligation trial (after which a fee applies).
- Speak with a loan broker - Discuss and compare the offers on the market to determine which one would be the best option for you.
Most homeowner loans require you to pay back in monthly instalments by direct debit, which you agree to when taking out the loan. There are options to repay early but you may be asked to pay a fee for redemption or an early repayment charge. If you feel you may be able to pay the loan off earlier, or that you would sometimes be able to pay more than the regular monthly instalments, you should mention this when discussing the loan.
PROS / CONS
Homeowner loans are a great option for someone who:
- Needs to borrow a large sum of money
- May struggle to get credit on another type of loan
- Can afford to make monthly payments
However, all borrowers should remember:
- Your home is at risk if you cannot pay back the money
- Your monthly repayments can increase if they are linked to variable interest rates
- You could be charged a penalty if you try to repay your loan early if the option you choose doesn’t permit it