Homeowner Loans

 

What exactly is a homeowner loan?

A homeowner loan means that you can use the security that’s in a property you own or have a mortgage on to secure a loan. Called a homeowner loan, you can use your property as collateral to secure your loan, but it’s important to understand just how they work before you take one out. Here’s what you need to think about before taking a homeowner loan out.

Homeowner loans – how do they work?

The premise behind a homeowner loan is pretty straightforward. In order to apply for a homeowner loan, you need to either be a homeowner or you need to have some equity in a property. You need to own your own home or have equity as you will be using the property to secure your homeowner loan. In short, a homeowner loan is a secured loan against a property that you own.

What is a Homeowner Loan? | Debt Consolidation Loans

Have I got home equity?

If you are a homeowner and own your property outright or are paying a mortgage, you will have home equity. Home equity is the value of the part of the property that you absolutely own as you pay your mortgage off. This will change over time as you pay off more and more of your mortgage. You can work out your home equity with a simple calculation. To work out your equity, you need to subtract the outstanding amount that you owe from the market value you of your mortgaged property.

For example, if you purchase a home for £400,000 and pay a deposit of 20%, or £80,000, you mortgage loan will be for £320,000. This means that – at the start of your mortgage agreement – your home equity is £80,000. This will change over time as you pay your mortgage off – your home equity will increase and you will own a greater percentage of your home outright. Your home equity will also increase as your property increases in value, as the amount that the property increases in value belongs to the person or people who are paying the mortgage.

What can I use a homeowner loan for?

You can actually use a homeowner loan for anything that you want to – as long as it is within the law. People tend to borrow a large amount of money for the same kinds of reasons. People often take out a homeowner loan to pay for improvements or refurbishments to their property. Improvements may include adding an extension, a conservatory, a new kitchen or bathroom or for new windows or central heating.

A homeowner loan does not have to be used to improve the home that secures the loan. A homeowner loan can be used in the same way as a consolidation loan – in order to pay off debts and pay just one lender, with one interest loan and one monthly payment. A homeowner loan may also help you to lower the various interest rates that you are paying on your other outstanding debts. It is certainly one way to put your financial affairs in order, leveraging your security to do so, but it will bring an added risk to your property. If you can make repayments on time and in full, then your loan agreement should not be compromised.

The features of a homeowner loan

  • You will benefit from a longer repayment term of 1 to 35 years
  • You will be able to borrow a certain percentage of the value of the property you are using as security
  • Interest is payable across the entire length of the loan term
  • Borrowers must pass both a credit and affordability check

What can I use as security for a homeowner loan?

You can use almost any type of property to secure your homeowner loan, but typical properties include houses and flats, apartments and bungalows.

How much will a homeowner loan let me borrow?

That will depend on your property’s value but homeowner loans can be secured from anything from £1,000 minimum to over £2 million. Lenders, when deciding how much you can borrow, will look at:

  • The value of the property that you are proposing as security
  • Your current age and the loan term you are seeking
  • Your current income
  • Your credit record

On all homeowner loans, lenders will set a maximum limit, which is called the loan to value. This is the amount of money that they will lend you and is dependent on the market value of your property. It is simple to work out the loan to value amount for your property.

Let’s take a look at a home that is worth £150,000. If you wanted to borrow £75,000, then that would generate a loan to value – or LTV- of 50%. Remember – if you already have a mortgage that you are paying off, then to calculate your LTV, you will also need to deduct your mortgage’s outstanding balance to find your LTV. Going back to our original calculation with a home worth £150,000 and a mortgage balance of £30,000, you would have £120,000 in equity. If you wanted to borrow £75,000 against this property, your LTV would be 62.5%.

Why is it worth Consolidating ALL your Debts into one Loan?

  • You can control your monthly budget
    A loan will help you manage your personal finances, as it’s only one payment – not many. 
  • Reduce the total amount you owe
    If the combined total interest of all your debt is higher than having one loan interest rate, you will actually save money.
  • Improve your future credit score
    You can take the opportunity of having one payment each month to prove that you are a responsible borrower. Therefore, it will have a positive effect on your credit rating.

 

How much does a homeowner loan cost?

Homeowner loans are very much like other types of loans. The cost of a homeowner loan will depend on the specific interest rate that is linked to that loan. These can vary from product to product and from lender to lender, so it’s important that you shop around when thinking about applying for a homeowner loan. As well as the interest charged on a homeowner loan, there may also be additional fees and charges to pay but this will also depend on the product and the lender. Reviewing homeowner loans across the market is advisable before you begin to apply for a loan. You may also wish to speak with an independent adviser.

What are the other costs of a homeowner loan?

You will have to pay interest on your loan, as well as charges or fees that will be set by your lender. Some lenders may opt not to charge fees, while others can apply hefty charges. Make sure that you know where your lender stands before you apply.

Interest

Interest on your homeowner loan will be charged for the entire repayment term of your loan. Interest charges will be added to your repayment rates as a matter of course – as you are repaying the initial sum borrowed, you will also be paying the interest that has been levied. The overall cost of your loan can depend on the amount of interest you are paying. If finding a cheap loan is most important to you, then you need to assess all the loans with the lowest interest rates attached to them.

It’s also really important that you are aware of the type of interest that your loan comes with, as this can impact the amount of money that you end up paying back. Some loans have a fixed rate interest while others have variable rates. Let’s take a look at the difference:

  • A variable interest rates can be cheaper when you first take the loan out, but it’s important to note that these rates can change over time. Linked to the Bank of England base rate or the LIBOR rate, this means that interest can go either up or down. While the Bank of England base rate has been very low for the last few years, this could change – and dramatically – meaning that the cost of your borrowing could increase beyond what you can afford.
  • A fixed interest rate will stay the same throughout the timespan of your loan. It is not linked to the Bank of England base rate, or LIBOR, and so will remain stable. This means, in real terms, that the rate that you pay back may be higher when you first start to pay off your loan, it will reduce over time as you pay more and more of the loan amount off.

When it comes to homeowner loans, it is more usual for lenders to offer variable rates instead of fixed rate options.

Fees

When you are considering applying for a homeowner loan, it is really important to look closely at what lenders offer so that you can understand what fees you may be charged as part of your loan agreement. While not all lenders attach fees to their homeowner loans, many do. It’s really important that you understand what they fees are, what they mean for your loan and how much they will impact the amount that you need to pay in the long run. Lenders may have a mixture of different fees and charges that they apply to a homeowner loan. Here are a few that you may be asked to pay for:

  • Valuation fees – Applied when a valuation is undertaken to work out the value of the property that you are using as collateral
  • Legal fees – Any associated legal fees with the loan
  • Disbursement fees – This may include fees, such as land registry fees
  • Broker fees – Fees that are payable to any broker used to assist the borrower

How can I find the best homeowner loan?

In order to find a secured loan – including a homeowner loan – it is likely that you will have to use a broker as many loans are only available through this channel. It is really important that you give this part of the process some careful thought as it can really make a difference to your outcome. It is both useful and crucial that you work your way through the points set out below when considering your application for a homeowner loan.

How much do you actually need to borrow?

What sort of a sum are you looking for? It might be that a homeowner loan is not the best financial product for your needs. If you want to borrow a sum that’s less than £25,000, you might want to think about taking out an unsecured loan, instead of a homeowner loan.

Do you know your loan to value?

It’s really important that you know where you stand. To find out this value, you will need two up-to-date- pieces of information. You will need both an accurate and recent valuation of your property alongside your outstanding mortgage balance, if you are still paying your mortgage off.

How long do you want to pay this loan off for?

Rather than choose a set time in the future and aim to have your homeowner loan repaid by that time, it might be better to work out your monthly payments and set your term loan accordingly. Making sure that your monthly repayments are affordable and reasonable will greatly increase your chances of paying off your homeowner loan without any payment issues. When you know what you can reasonably afford to pay each month, then you can decide on the best loan term for you.

Take the time to check your credit record

It can really make a difference to check your credit record before you apply for a homeowner loan. Credit reports can have mistakes on them, whether from human error or any other reason, but yours could return a red flag unexpectedly. You will only benefit from understanding if your credit rating is good, fair or bad. There are also several different actions you can take to improve your credit record, such as adding your name to the electoral register.

Make an appointment with a secured or homeowner loan broker

Experts in the secured and homeowner loan markets, they will be able to help you understand what you need to do and consider before applying for a loan. They will help you to look at all the loans on the market and to understand if a homeowner loan is the best financial product for your situation.

Why is it worth Consolidating ALL your Debts into one Loan?

  • You can control your monthly budget
    A loan will help you manage your personal finances, as it’s only one payment – not many. 
  • Reduce the total amount you owe
    If the combined total interest of all your debt is higher than having one loan interest rate, you will actually save money.
  • Improve your future credit score
    You can take the opportunity of having one payment each month to prove that you are a responsible borrower. Therefore, it will have a positive effect on your credit rating.

 

I’ve applied for a homeowner loan – what happens now?

If you’ve gone through all the steps set out and have decided to apply for a homeowner loan, you will have settled on the lender that you want to work with. It’s now time for your prospective lender to carry out some checks on your financial viability. Looking for evidence of the ability to pay the homeowner loan back under the terms of the agreement, the lender will:

  • Check your credit record – look to see if your credit score suggests that you are financially viable
  • Checking your income and recent payslips – Track recent evidence of your income as an indication that you will be able to afford the repayment schedule
  • Check with the housing registry to confirm you own the property and to understand of you are in a position to offer the property as collateral against the homeowner loan
  • Assess both the market value of your property and your equity, in order to work out the correct LTV of your loan and set your homeowner loan amount

Working their way through this checklist can take anywhere between 3 and 5 weeks to complete. Once they have completed all stages of the checking process, the homeowner loan funds will be transferred into your nominated bank account.

How do I pay back my homeowner loan?

Most secured loans are paid back using the same method, but you might want to discuss this with your loan broker before deciding on which homeowner loan to apply for.

In the main, homeowner loans, and secured loans in general, come with a requirement that you pay the loan back in monthly repayments, against a repayment schedule set out by the lender. These monthly payments are mostly paid back to the lender through a direct debit. It may be that your lender is open to other methods of payment but this would need to be agreed with the lender before you sign your loan agreement.

I have a homeowner loan but I want to move house – what do I do?

If you have a homeowner loan that you are still paying off and you want to move house, it is possible. There are three options that you can use to make your move possible:

  • Take your loan with you – You can move home, transferring your outstanding loan to your new property. Lenders are open to letting borrowers transfer their loans but they usually attach a fee to the transfer. Make sure you speak with your lender before moving
  • Settle your outstanding homeowner loan amount by using the proceeds of the sale of your house. This is possible but it is important to look at your finances carefully to understand if, in doing this, you can still afford your new property or the deposit on your new property.
  • You might be able to borrow more in order to pay off your homeowner loan. If you find that you cannot afford to settle your homeowner loan balance from the funds raised by the sale of your house, you could borrow the amount needed to pay it off. This option might impact your eligibility for your new mortgage however.

It’s important to remember that paying off your homeowner loan early may result in an early loan repayment charge being added to your outstanding amount for repayment.

Can I use my house to get a loan if I already have a mortgage?

Yes, you can. You can take out a homeowner’s loan against the property that you are already paying off another mortgage on but you must ensure that you have enough equity in your property to do so. The amount of equity is the amount or percentage of your home that you own outright, either through the amount of deposit paid, the amount of mortgage you have repaid or the amount that your property’s value has increased by since your purchase.

I need a payment holiday on my homeowner loan – what do I do?

This will depend on both the type of loan that you have taken out and the lender behind the loan. Speak to your lender as soon as possible to ask about a payment holiday. If your lender agrees to a payment holiday, then this amount of time with be added to the end of your loan agreement, increasing the total cost of borrowing as you are now going to take longer to pay back your outstanding loan amount.

How long does it take to get a secured loan?

A decision on your loan can take moments, but it can take anywhere from 3 to 6 weeks to complete the application process. It will depend on your lender and their application process. If this is important to your application, speak to your lender about this before applying.

Is a secured loan better than an unsecured loan?

It really depends on your circumstances and what is better for you. While a secured loan does put your property under risk of repossession, it does enable you to borrow money, by quite a considerable amount. Although you can borrow more, you can pay it back over a longer time which might make it more cost effective in the long run.

Will I lose my house if I don’t pay on time?

Yes, this is a possibility. With both a homeowner loan or a secured loan, you have put forward your property as security against an amount of money that you wish to borrow. It’s important that you proceed with a loan like this in the full knowledge that this can happen. However, most lenders will use repossession only as a very last option because of the costs associated with repossession and recouping their costs.

Why is it worth Consolidating ALL your Debts into one Loan?

  • You can control your monthly budget
    A loan will help you manage your personal finances, as it’s only one payment – not many. 
  • Reduce the total amount you owe
    If the combined total interest of all your debt is higher than having one loan interest rate, you will actually save money.
  • Improve your future credit score
    You can take the opportunity of having one payment each month to prove that you are a responsible borrower. Therefore, it will have a positive effect on your credit rating.