Homeowner loans (also known as secured loans) allow you to borrow money against the equity in your home. They can be taken out alongside your existing mortgage and allow you to pay lower a lower interest rate, borrow more money and take a longer loan term than would be possible with an unsecured personal loan.
In this guide, we will break down what a homeowner loan is, what they can be used for and some key tips for getting the best deal with the top rate.
What is a homeowner loan?
A homeowner loan is a type of secured loan that allows you to borrow money alongside your existing mortgage. They are used to release equity from your home or an investment property on a second charge basis.
This type of loan can be arranged quickly, usually in 14-21 days, which does compare favourably to a mortgage, which usually takes around 4-6 weeks.
They are usually offered at lower interest rates than unsecured loans. This is because the lenders risk is reduced as they have security over a property (also known as collateral), meaning they faceless risk of financial loss should you fail to keep up the repayments. This makes them easier to get for borrowers with a bad credit history.
As these loans are secured against the home of the borrower, you must be a homeowner in order to qualify. This is true of all secured credit.
What can I use a homeowner loan for?
They can be used for the following:
- Consolidating other debt such as credit cards, store cards, loans and overdrafts to reduce how much you pay each month.
- To finance home improvements such as refurbishment or extension of the property.
- To finance large one off purchases such as weddings, holidays, a new car (and related insurance) or other significant costs.
- To release equity to buy a second property (to act as the deposit for a buy to let mortgage) or other investment property deals.
- To borrow money to start a business, or fund an existing business (although not all lenders will allow this).
All of these uses are acceptable to lenders in theory. When making an application, your lender or broker will request details of how the funds will be used.
It’s important that you’re as clear as possible, to ensure that the most appropriate product is selected. This will ensure that you access the best deals for your circumstances, pay the least interest and fees and have the best chance of approval.
How do they work?
They allow you to borrow money from a lender, using your property as security for the loan. You then repay the loan through a regular payment each month.
Your payments are made up of both capital (the money you borrowed) and interest.
The amount you pay each month will depend on your loan size, loan term and the interest rate you pay.
Watch our explainer video
Is taking out this type of loan a good idea?
Yes, a it is a good idea if you’re looking to borrow money and are happy to for it to be secured against the equity in your home. Doing so can allow you to use the funds to your advantage, whether you’re undertaking home improvements or consolidating other loans and credit cards to improve your financial security.
By offering security, your lender will give you a better deal. The benefits you’ll receive include include a lower fee or a better rate.
Of course, defaulting on the loan will also impact your credit score, making it considerably harder to obtain credit in the future, so it’s a tough call.
This is why a secured loan, or even any loans secured against property should only be taken out if you are certain you can make the repayments to your lender on time and without the risk of financial hardship.
How much do secured homeowner property loans cost?
The costs associated with secured homeowner finance are made up of the interest charged and any charge required to set up the loan.
The longer the repayment term, the more interest you will pay over time. Let’s imagine you take out a homeowner loan for £35,000 at an interest rate of approximately 4%, which is a reasonable estimate of homeowner loan interest rates currently.
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Consider all the variables and find the perfect balance between affordable monthly repayments and not overpaying in interest. In addition to the core expenses, you’ll likely accrue additional fees when taking out these loans. These include:
- Any charge for the valuation of your property on behalf of the lender
- An arrangement fee charged by the lender
- A broker fee, which may be as much as 12.5% of the total loan
- An exit charge if you wish to repay the loan early, designed to recoup some of the interest the lender will miss out on. This is usually tied to a special interest offer such as a fixed rate or discounted rate, with the early repayment charges ending at the end of the special rate period.
Most of the time, these fees will be added to your total debt meaning you will also pay interest on them.
What interest rates will I pay?
When securing a loan against your home, secured loan lenders charge rates between 5.5-9% per annum on average.
The interest rate that you pay depends on your credit history (bad credit loans tend to have higher interest charges and sometimes a higher lender fee).
That said, if you have a poor credit score, there’s no reason to think you’ll overpay, we can still offer some very good products with low interest rates.
What are the advantages of home loans?
The advantages are:
- You can take a higher loan size than unsecured loans.
- Lower interest rates than personal loans.
- You’re more likely to qualify for a secured homeowner loan than an other options if you have a low credit score.
- Can be arranged more quickly than a mortgage.
- Can be used to repay other debts such as loans, cards and overdrafts, saving you money in the process.
What are the disadvantages of homeowner loans?
There are drawbacks to taking out one of these types of loan, the biggest of which is the risk of repossession if you fail to repay the money that you borrow.. Other potential issues to consider include:
- You may have to pay a handful of fees associated with the arrangement of the loan, and there will likely be an exit fee if you wish to pay off the loan early.
- Loans with variable rates can result in drastically fluctuating repayments. If the Bank of England Base Rate increases substantially, you’ll be making bigger monthly repayments than you initially budgeted for. Of course, a fixed rate product would remove this risk.
- A sizable secured loan, repaid over an extended period, will result in you paying a lot of interest. This may end up being costlier than drawing up a financial plan to tackle debts or save for a major investment.
- If you wish to sell your home, you’ll need to ensure you can repay the loan – plus any early exit fees, as is the case with a mortgage.
- Some secured loan brokers charge very high fees when arranging these loans. Often up to 12.5% of the loan – although we only charge a low, fixed fee of £1,495.
Consider all your options and discuss your situation with a professional secured loan adviser if necessary. This will help ensure you make the best decision based on your circumstances.
A good broker will get to the bottom of your situation, guides you through the process and will compare loans for you. This includes checking whether secured loans or a residential mortgage is more appropriate.
You can then expect your representative at your broker or lender to show you a report that outlines why the deals they offer are the most appropriate.
Can I get a homeowner loan with bad credit?
Yes, if you have a poor credit score, you can still qualify. In fact, as you’re offering security, they are one of the best options for borrowers with adverse credit history or a sub-par credit score.
Credit history is usually less of an issue and some lenders even specialise in bad credit homeowner loans. While Equifax or Experian may give you a low score, some lender will look past this and focus only on recent issues.
Issues that we can consider include:
- Missed payments on loans and credit cards
- Previous mortgage arrears
- Defaults, CCJs or IVAs
- Previous bankruptcy
- Incorrect information on your credit profile
For homeowners with previous credit history problems, it’s even more important to proceed with caution. Make sure that you can afford to pay the proposed repayments comfortably, or you will risk causing further damage to your credit rating.
What are the alternatives?
The alternatives are:
- Personal loan
- Credit cards
- Bridging loans
Of these alternative products, there is only a certain amount of crossover in each case. For example, a bridging loan is a short-term loan secured against property, and can only be taken for a maximum of 12-18 months, so is unsuitable for longer-term needs.
Equally, a personal loan is usually only available for smaller amounts and over terms up to 5 years. As they are not secured against property, you will need a higher credit score to qualify and the monthly amount that you pay your lender will be higher.
Finally, a credit or store card is a form of revolving credit and is unsuitable if you’re looking to borrow a set amount of money and repay in a linear way over a set term. While it is an alternative in some cases, this statement isn’t really representative of the level of crossover.
Homeowner loans vs mortgages
Homeowner loans, also known as home loans are an excellent and safe alternative option to remortgages when you’re looking for lending against your home equity.
This is true whether you’re looking to use your home loan for debt consolidation (to repay a credit card or unsecured loan), home improvement or to fund the purchase of a vehicle.
Both remortgages and home loans allow you to borrow money using your home, with providers taking a charge over the security property until you completely pay off the facility.
The difference in overall cost and the monthly instalments will depend on the interest rate charged, the loan term and amount of money you borrow.
To compare remortgages with home loans, you must consider all costs. At ABC Finance, we compare this for you, so you can be confident that you’re making the right choice for your finances before you decide to move forward.
Am I eligible for a homeowner loan?
Yes, if you own your own home, there is a high chance that you’ll be eligible. We can offer loans to individuals, joint borrowers, ltd companies (on buy to let properties) and even borrowers with bad credit.
As long as you can afford to pay back the money you borrow, as well as your mortgage, there is a good chance that we can help.
Read more – Homeowner loans for self-employed borrowers
Do banks offer a loan for homeowners?
Yes, banks offer a range of products, however there are a range of lenders offering these loans. This means that you can often get a better deal elsewhere, through a lender who specialises in secured loans.
When borrowing money against your home, it’s important that you make measured decisions, so don’t accept the first loan you’re offered.
A good homeowner loan broker can help you to compare offers from multiple lenders, which can save you a lot of money, especially if you have bad credit or a low credit score.
Finally, each lender has their own way of deciding which loans to approve, so if you’ve been declined, you may find a suitable home for your loan qualify elsewhere.
No lender is representative of the whole market. If you’re looking to borrow money against your home while keeping your mortgage, get in touch now. We have a will compare products from across the market and even have specialist low credit score products available.
How much can I borrow?
We offer loans from £10,000 up to £1,000,000.
The amount of money you can borrow against your home will depend on the property value, your current mortgage balance, your income and credit score.
Homeowner loan lenders factor all of these elements in when calculating the maximum loan, much like a mortgage does.
Each lender will have their own way of calculating the maximum borrowing on secured loans. As such, it’s important that you compare as many as possible if looking to borrow as much money as possible. A good broker can do this for you.
What is your maximum loan-to-value ratio (LTV)?
We offer loans up to 95% LTV when you borrow against your own home, or 90% when you borrow against a buy to let.
How does a broker fee impact your repayments?
The fee charged by brokers heavily impacts the cost of your loan, with many choosing to charge very high fees for their service.
Some brokers charge up to 12.5% of the loan amount when arranging a homeowner loan. This means you’d pay £5,000 on a £40,000 loan.
In most cases, these charges are added to the loan, rather than being paid for upfront. While this may soften the blow of a large one off cost, it actually worsens the problem and means you pay much more overall.
When adding £5,000 to your balance, you will then pay interest on it for the full term. For a loan term of 25 years, at a rate of 7%, the £5,000 charge would actually end up costing you £10,601 in total! This is over 25% of the amount you originally borrowed!
We simply charge a fixed £1,495 fee for homeowner loan applications, regardless of the loan size.
What is the difference between a homeowner loan and a secured loan?
There is no difference between a homeowner loan and a secured loan, they are terms that can be used interchangeably to describe a type of financing that is secured against your home or a buy to let property.
Simply put, these 2 types of loans are the same product and compare directly with each other. Homeowner loans are also known as a second charge mortgage or home equity loan.
How Credit Score Impacts Your Home Financing Approval
Your credit score plays a pivotal role when you’re looking to secure home financing.
A robust credit score can open doors to favourable fixed-rate interest options and give you the confidence to borrow more. On the other hand, a lower score might limit your lending options, but it doesn’t close the door entirely.
Remember, lenders assess more than just your credit cards and payment history. They’ll delve into your overall financial health, how your home finances are managed, examining factors like employment status, current debt consolidation loans, and even your online banking habits.
It’s essential to check your credit report regularly and ensure all information is up-to-date. If you’ve faced challenges managing credit cards or have outstanding unsecured loans, consider seeking advice on improving your credit before diving into the world of home lending.
Why Choose Home Lending Over Unsecured Loans?
Opting for home lending offers several advantages over unsecured loans.
Firstly, with home lending, you’re likely to access lower interest rates, making monthly payments more manageable.
This is because the loan is secured against the value of your property, giving lenders the confidence to offer better terms. Unsecured loans, on the other hand, don’t require collateral like your home, but they often come with higher interest rates.
Moreover, with home finance, you might find the right loan term that suits your budget, allowing for flexibility in repayment. It’s also worth noting that with home lending, you can borrow more substantial sums, especially if you have significant equity in your property.
This can be particularly beneficial for larger projects or investments, such as home improvement loan needs or even consolidating high-interest credit card debts.
Understanding the Interest Rates of Home Financing
Interest rates are a crucial aspect of home financing. They determine how much you’ll pay over the loan term, influencing your monthly payments and the total cost of borrowing.
Interest rates for home financing are influenced by several factors. The Bank of England’s base rate, your credit score, the loan-to-value ratio (LTV), and even global economic conditions can play a part.
Typically, a lower LTV – meaning you’re borrowing less compared to your property’s value – can lead to more favourable interest rates. It’s also essential to differentiate between fixed-rate interest and variable rates.
Fixed rates remain constant for a set period, offering stability in monthly payments. In contrast, variable rates can fluctuate, impacting your budgeting.
Always use our loan calculators and seek expert advice to understand which interest rate structure aligns best with your financial goals and circumstances.
Here are some of the frequently asked questions we commonly hear about loans against your home:
Are secured homeowner loans suitable for a homeowner to borrow money with a poor credit history?
Yes, regardless of your personal circumstances, a homeowner loan (also known as home equity loans) can be the right loan for you.
Even if you have a bad credit history, as long as you have a good reason to want to borrow and can afford the loan repayments of the loan and your existing borrowing.
Are the interest rates and the lender fee impacted by how much equity I have in my security property?
Yes, the overall cost of your loan will depend on the loan to value ratio, the current market value of your property and your outstanding mortgage balance.
The best deals with the lowest APR are offered where there is more equity available, even after the homeowner loan application is made.
Can I apply for this type of loan if I’m not a homeowner?
No, you must be a homeowner in order to qualify. Any loans which are secured against property require you to own your own home, or an investment property.
Home loans secured against a relatives (who are homeowners) property are usually very difficult to arrange and not something we currently offer.
Get in touch by phone, email or fill in the form now to get a personalised quote based on your circumstances.
At ABC Finance, we leave no stone unturned when you take advantage of our homeowner loans service, priding ourselves on finding the best APRC while sticking to our low broker fee promise.
Are they easy to get compared to other loans and mortgages?
Yes, they’re easier to get than other financial services, such as an unsecured loan and you’re more likely to be accepted. This is because of the reduced risks faced when lending against a property.
A home loan is secured against the equity in your property, meaning you’re more likely to be approved. That’s because when you take out second mortgages, the lender always has the ability to repossess the property should you fail to keep up repayments. Of course, this is a last resort, but it is worth considering the risk before you apply.
Why do homeowner loan broker fees cost so much money?
We charge a fixed £1,495 broker fee when you take out secured finance through ABC Finance. This is far lower than most brokers, and can save you thousands of pounds.
The fees charged by brokers when you take out this type of loan can be up to 12.5% of the loan amount. Most borrowers choose to add the broker fee to the loan total amount borrowed, you will increase your monthly instalments, the overall cost of the loan and will pay additional interest. Using ABC Finance saves our clients an average of £2,880!
What is a loan-to-value ratio?
Loan-to-value is the total amount that you owe (including existing borrowing), compared to the value of your property. Loan-to-value (LTV) is expressed as a percentage.
The more equity you have in your property, the more you will be able to borrow (subject to affordability). If you have very little equity in your home, the amount you can borrow will be limited.
What is home equity for these loans?
Home equity is the difference between your property value and the amount you owe against it. For example, if your property is valued at £250,000 and you owe £100,000, you have £150,00 of home equity.
When assessing an application for lending, your provider will look at the amount of equity that you have in your home. Your available equity, loan to value, credit report and income are the biggest factors that impact whether your application is approved.
Home loans: How is a home improvement loan different to a home equity loan?
A home improvement loan is a type of personal loan that is specifically designed to fund home renovations or repairs. It is unsecured, meaning it doesn’t require collateral such as your home’s equity.
On the other hand, a home equity loan is secured by your home’s equity and typically allows for larger loan amounts and longer repayment terms.
However, it also carries the risk of losing your home if you fail to repay the loan. Home improvement loans generally have shorter repayment terms and higher interest rates, but they don’t put your home at risk. It’s important to compare APR, fees, and repayment terms when deciding which loan is best for your personal circumstances.
Although home improvement loans are usually unsecured, They can also be used for home improvements.
How does my credit score influence the interest rate on my home loan?
Your credit score is a significant factor when determining the interest rate for your home financing.
A higher credit score often leads to more favourable interest rates, as it indicates a lower risk for the lender. On the other hand, if you have a lower credit score due to past credit card debts or other financial challenges, you might face higher interest rates.
Can I use home lending for debt consolidation, especially for credit cards?
Yes, many homeowners opt for home lending to consolidate their debts, including credit card balances into this type of loan. By consolidating multiple debts into a single home loan option, you can potentially benefit from a lower interest rate and manage your finances more efficiently.
Home loans – What’s the difference between fixed-rate interest and variable rates?
Fixed-rate interest means your interest rate remains constant for a specified period, ensuring stability in your monthly payments. Variable rates, however, can fluctuate based on market conditions and the Bank of England’s base rate.
It’s essential to understand the implications of both before choosing your home financing option.
Homeowner loans are secured against your property. Before you apply for a secured loan, be aware that your home is used as security. This means your home may be at risk if you fall behind with your secured loan or mortgage repayments.
Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.