Homeowner loans
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What is a homeowner loan?
A homeowner loan is a type of secured loan that allows you to borrow money against the value of your property. Also known as a second-charge mortgage, a homeowner loan uses your home's equity (its value minus any outstanding mortgage) to help calculate the available amount. The higher your equity, the more you'll be able to borrow. Some lenders offer unsecured homeowner loans but these tend to require a guarantor to secure the loan for you.
Types ofhomeowner loans
Here are four types of homeowner loan for you to explore:
Single Homeowner Loans:
Like any secured loan, homeowner loans usually offer lower-than-average interest rates, larger loan amounts and longer repayment periods. The exact terms will vary by loan provider and will depend on your income and other circumstances. You may want to prioritise fixed rates of interest to make your repayments more predictable, and remember that defaulting on a secured homeowner loan puts you at risk of losing your property.
Get your quoteJoint Homeowner Loans:
If you share your mortgage with a spouse or partner, you could take out a homeowner loan together. Everyone named on the mortgage would need to sign the loan agreement and undergo the same checks. Joint homeowner loans are often easier to obtain because the lender combines your household income when assessing your affordability. Also, the highest credit score "wins", which could be helpful if one partner has a weaker credit history than the other.
Get your quoteBad Credit Loans:
A homeowner loan could be an attractive option if your credit score prevents you from obtaining other types of financing. Bear in mind that the interest rates on bad credit loans tend to be higher and you risk further damaging your credit history if you fail to keep up your monthly repayments. On the other hand, you could improve your credit score with a well-managed homeowner loan for bad credit.
Get your quoteDebt Consolidation Loans:
If your monthly outgoings are mounting up due to existing debts, a debt consolidation loan could help you manage your costs with a single monthly repayment. Make sure that the interest rate on this loan leaves you in a better financial position than before, and try to avoid taking on further debt now that your outgoings are reduced.
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Is a second-charge mortgage the same as remortgaging?
Second-charge mortgages and homeowner loans are secured against your equity, but they don't affect your mortgage in the same way as remortgaging:
Second-charge mortgage:
This is more like a top-up to your existing mortgage that allows you to access funds as a property owner. It's not a form of "equity release" that converts your equity into a lump sum.
Remortgaging:
A remortgage is when you switch to a new mortgage deal on your property. Remortgaging can be helpful if you're looking for better rates, to reduce your monthly outgoings or to receive your equity in the form of cash.
Homeowner Loans Pros and Cons
Advantages of a homeowner loan
- Access to funds: As long as you own all or part of your property, a homeowner loan offers convenient access to funds even with a poor credit history. You're more likely to be accepted for a secured homeowner loan because the loan provider has that extra security.
- Larger loan amounts: Secured homeowner loans typically offer larger sums than the average personal loan, which means your home improvements project or dream holiday could become a reality sooner than you thought.
- Lower interest: Because they're less risky for lenders, homeowner loans usually have lower interest rates than unsecured loans. Remember that APR (Annual Percentage Rate) is the more accurate measure of your total fees and interest charges.
Disadvantages of a homeowner loan
- Risking your property: As with any secured loan, the lender can sell your home to recover the debt if you fail to keep up your monthly repayments. It's important to think carefully before taking on a secured loan and consider all your options, including unsecured loans and personal loans.
- Affordability: Larger loan amounts and long repayment periods might seem attractive at first, but your expenses can easily mount up over the long term, especially if your finances change. Either way, longer repayment periods mean you'll pay more in total interest and there's usually a fee for settling your loan early.
- Unexpected interest: Homeowner loans don't always come with fixed interest rates. A variable rate means the interest could go up with inflation and the Bank of England's base rate. This could be a problem if the economy takes a dip and rates rise over the long term.
Who Is a Homeowner Loan Suitable For?
Homeowner loans are designed for individuals with a mortgage who typically want to borrow large sums of money. They can be suitable if you:
- Own your home
- Want an alternative to mortgaging
- Are struggling to be accepted for a personal loan
- Want to cover large expenses, e.g., home improvements
- Need to consolidate existing debts
What to consider before applying
If you're thinking of applying for homeowner loan or second-charge mortgage, keep the following points in mind:
Our expert says:
‘’Homeowner loans can be a powerful tool for accessing funds, whether for home improvements, consolidating debts, or major purchases. As ever, it's crucial to understand the terms and choose a loan that fits your financial situation.”
Frequently Asked Questions
What happens to my homeowner loan if I move house?
Already taken a homeowner loan and thinking of moving? Don't panic. Many lenders give you the option to transfer the loan to your new property, or you could pay off your loan early with money from the sale. Both of these options will usually be subject to a fee. A third option is to pay your remaining secured loan with an unsecured loan before you move. Remember that your first mortgage takes priority and your mortgage lender must give permission for a new homeowner loan. This is known as consent to a second charge. They might refuse consent if they believe you can't afford it.
How to pay off a homeowner loan
Plan ahead: First things first, use our homeowner loan calculator and make sure you could afford the monthly repayments. Think about how your finances could change over the long term, especially if the loan has a variable rate of interest.
Manage your finances: Try to cut back on unnecessary expenses and focus on your loan repayments instead. It's important to keep secured loan repayments up to date. Falling behind can impact your credit score and ultimately cost you your home.
Don't let the weeds grow: Even though most lenders will charge a fee for settling your loan early, it's a good idea to settle your loan sooner rather than later. Where possible, try to make extra payments towards your loan and reduce the total outstanding amount.
How do secured and unsecured homeowner loans differ?
The vast majority of homeowner loans are secured against your property. Some lenders offer unsecured homeowner loans but they'll need to be backed by a guarantor.
How much can I borrow with a homeowner loan?
Because homeowner loans are secured against your property, lenders tend to offer larger loan amounts, often up to £500,000. The exact amount depends on your circumstances and the value of your home. Smaller secured loans of £10,000 or £15,000 are also common.
What can I use a homeowner loan for?
When it comes to secured loans, lenders aren't usually picky about why you want to borrow. You could use a homeowner loan for large purchases like a wedding or a new car, home improvements, a deposit on a second property, or debt consolidation.
Does a homeowner loan affect my mortgage?
As well as changing access to your equity, a homeowner could increase your monthly outgoings. This might affect your mortgage and remortgage options in the future. On the other hand, paying your homeowner loan in a timely manner will likely strengthen your credit score and your attractiveness to mortgage lenders.
How do I apply for a homeowner loan?
If you own part or all of your home, use our homeowner loan calculator to find loans than suit your needs and circumstances. Lenders will want to know about your credit history, how much equity you have in your home, as well as details about your income and outgoings.
What are the alternatives to a homeowner loan?
If you'd rather not take a secured homeowner loan, you could consider an unsecured personal loan. Borrowers with a good credit history can usually access up to £25,000 with an unsecured loan while keeping their interest rates relatively low. You might also be able to remortgage for a larger amount and benefit from the additional cash. For smaller amounts, a low-interest credit card or overdraft could be a useful option.
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