Homeowner loans are a simple concept: they are secured against property and therefore only available to people who own their property outright or with a mortgage. That means that they are not available to people who rent a home or are in any form of social housing.
If you own your own home and are looking to borrow sum money, then you will want to know whether a homeowner loan is right for you and whether it makes more sense than the myriad of other borrowing options open to you.
So, to make that decision easier, we’ve put together this guide to help you decide whether to start looking for a homeowner loan or to go down another route:
1. How much do you need to borrow?
Homeowner loans usually make more sense for people who want to borrow a more substantial amount of money than other forms of lending. That’s because the sums on offer are usually larger than with other forms of lending – sometimes as much as £300,000.
2. How long do you need to pay back a loan?
While unsecured personal loans usually have a maximum loan term of five to seven years, homeowner loans are similar to mortgages in that that they can extend out to 25 or even 30 years. If you need to borrow a larger amount and want longer to pay it back, then homeowner loans are definitely something to consider.
3. How much interest can you afford?
While unsecured loans can come with higher interest rates, homeowner loans are generally slightly cheaper. That’s because the lender has the security of your home to fall back on should you fail to keep up with the repayments or otherwise default on the loan agreement.
4. How much equity have you got in your house?
Homeowner loans are often referred to as ‘second charges’ or second mortgages and so the prospect of adding yet more in borrowing against your home can be daunting. But if you have a reasonable amount of equity in your home (the difference between its current value and any outstanding mortgage) then many lenders will be prepared to consider you for a homeowner loan.
5. Is remortgaging not an option?
If you want to borrow a larger amount of money, you might consider remortgaging your home. But there may be early redemption fees on your existing mortgaging or you might be enjoying a good fixed rate – which you would have to give up – and so a homeowner loan might make more sense financially.
6. Are you planning home improvements?
Most major home improvements – extensions, new kitchens, conservatories, etc – will add value to a house. If you are planning a major upgrade for your house, then a homeowner loan might make financial sense because it will be an investment and could increase the property’s value by more than the loan amount.
7. Do you want to release equity but can’t get a new mortgage?
Banks continue to restrict mortgages with tight lending criteria. You might want to release some of the value currently locked up in bricks and mortar but have been turned down for a new mortgage. Homeowner loans are a good alternative for people with poor credit records.
8. Do you have a lot of other debts?
Debt consolidation can reduce the amount you have to repay each month by rolling all of your existing loans and credit card balances into a single, new loan. While unsecured loans can be used for this, homeowner loans often come with lower interest charges particularly for people with impaired credit ratings.
9. Thinking of buy to let?
Buy-to-let mortgages are increasingly hard to come, particularly if you’ve made financial mistakes in the past. But if you have got sufficient equity in your home many lenders will consider you for a homeowner loan that can be used to fund a new buy-to-let property.
10. Can you plan ahead sufficiently?
While unsecured loans have relatively short repayment schedules, homeowner loans can run for 25 or even 30 years. That means that if you want to be able to keep your monthly repayments down, are able to plan for the long term with sufficient confidence and believe that your circumstances are unlikely to change significantly, a homeowner loan could provide you with the finance you need to suit your lifestyle.
11. Do you mind paying extra fees and charges?
Very few people do! But with remortgaging, you are likely to face a raft of new set up fees, charges and other terms and conditions. Those might include valuation fees, legal fees for conveyancing work and an arrangement or set up fee. While these are usually lumped onto the mortgage total, they can run to several hundred or even thousands of pounds. In contrast, homeowner loans usually come with fewer fees and hidden charges.
There are no hard and fast rules when it comes to any form of borrowing and secured loans are no different. You need to work out whether a remortgage or homeowner loan is right for your particular circumstances and which will make more sense over the long term. Make sure that you read all the small print before choosing which type of secured loan to go for – watch out for early repayment penalties which will cost you if you find yourself able to pay off the loan or mortgage early and make sure the interest rate advertised is the one that you are actually offered because a lower credit rating might mean you end up paying more than you had bargained for.
Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans – a company with many years’ experience in advising clients of their most suitable type of credit.