Homeowner Loans with No Mortgage: Secured Lending on Unencumbered Property
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Homeowner loans are traditionally offered as a form of second charge finance, sitting behind your main first charge mortgage.
That doesn’t mean that they always have to work this way. An unencumbered property – one that’s owned outright without an existing mortgage – can still qualify for a homeowner loan.
This situation, with a lot of equity is actually a very strong borrowing position, and while it’s rare for borrowers to secured a homeowner loan in this situation, it is possible and can be a very strong option.
Homeowner Loans With No Mortgage
Common reasons to go down this route include:
- To fund home improvements
- To consolidate existing unsecured debts
- To support family (for example, gifting for a wedding or a deposit for a property)
- For business or investment purposes
- Raising funds quickly, when it’s not practical to wait for a mortgage
This approach can actually be advantageous as the loan to value will be very low, affordability usually not an issue as there are less outgoings and there is no existing mortgage lender that must consent to a second charge.
With the whole property value available as security, things can move quickly and seamlessly to completion.
Borrowing Against an Unencumbered Property
While most homeowner loans are taken on a second charge basis, when there is no existing mortgage, the lender will take a first charge.
Functionally, it is the same position as having only a mortgage, but it is underwritten as simply and quickly as a secured loan.
This means you benefit from more flexible lending criteria and a faster application process.
Borrowing against an unencumbered property may be limited by loan to value, the lenders maximum loan size or affordability – which still applies even when the loan to value is very low.
This is a regulatory point, and no matter the reason, no lender can offer an FCA regulated loan that does not pass affordability checks.
The Difference Between Equity Release and Homeowner Loans
The key difference between equity release and homeowner loans is the repayment structure. Homeowner loans work much like a traditional mortgage, with monthly repayments required to repay the loan over the loan term.
Equity release, which is usually offered to borrowers over 60 or 65, has no monthly repayment and instead sees the interest roll up each month.
The next key difference is how each product impacts equity in the property over time. Equity release, due to the rolled up interest, tends to reduce equity over time as the interest balance grows.
Homeowner loans are repaid throughout the loan term, bringing down the loan balance and increasing equity over time.
If you’re unsure which product would be the best fit for you, contact our team of experts. We’ll offer free advice and can guide you on which product would best meet your needs.
Interest Rates for Unencumbered Homeowners
The interest rates on homeowner loans for unencumbered properties is often low due to the low loan to value and risk profile.
Interest rates are influenced based on:
- Loan-to-value (LTV)
- Credit profile
- Income and affordability
- Loan size and term
When looking at the cost of a homeowner loan, look beyond the headline interest rate, as this often only tells part of the story.
Consider the impact of fees, especially broker fees, the loan term, APRC and repayment structure.
Adding fees to the loan can also significantly impact the cost of credit, so be careful when doing so.
