A homeowner loan is a type of loan that’s only available to… well, people that own their own home. Pretty obvious, right?
And, whether you’re planning on finally getting that extension you’ve been dreaming of for years or you need some help tackling your other debts, homeowner loans can be a great option to borrow the money you need, often at better rates than unsecured loans.
However, because you’ll be using your home as collateral, it’s important to be fully clued up before you apply.
So let’s take a look at exactly how they work, and what you need to think about before applying for one.
How do homeowner loans work?
A homeowner loan is a type of secured loan, which means the money you are borrowing is secured against some form of collateral. The lender can then pursue that collateral should you fall behind with your repayments.
In the case of a homeowner loan, the loan is secured against your home. This is hugely important, as it means that if you get into issues paying the loan off ‒ perhaps because you lose your job or fall ill ‒ then the lender could look to repossess your property in order to get back the money you owe them.
In fact, technically, homeowner loans are specifically secured against the equity you hold in your home…
What’s equity you ask? Jargon-busting time!
Equity is basically the value of the property that you own outright ‒ in other words, it’s the difference between the value of your home and your outstanding mortgage.
So if you have a property worth £300,000 and you’ve got £100,000 outstanding on the mortgage, then you have £200,000 equity in the property. But if you’ve got a mortgage worth £250,000 still, then you only hold £50,000 equity.
A homeowner loan is sometimes referred to as a second mortgage, and with good reason as it works a lot like one. You take out the loan over a set term, as you do with a normal mortgage, and then make monthly repayments. At the end of the term, if you’ve made all of your payments, your homeowner loan is all paid off.
What can you use a homeowner loan for?
A homeowner loan can be helpful if you want to raise some money without going for a traditional mortgage. This might be because you’ve already got a cracking rate on your mortgage and don’t want to remortgage, or would have to pay additional fees for switching to a new mortgage.
For example, you might decide that it’s time to carry out some big work on your property, like a loft conversion or finally getting that fancy hot tub installed in the garden. You may not be able to borrow enough to cover that work through some other form of borrowing, like a credit card or an unsecured loan, but a homeowner loan could be the answer.
Homeowner loans are also a useful option if you have a host of other debts that you want to consolidate into a single loan. You might have a handful of other loans outstanding, and keeping on top of the various different balances and repayment dates can be a bit of a hassle.
But with a homeowner loan, you might be able to bring them all together into a single loan, making things a bit easier to keep track of and — in most cases — cheaper in the long run, too.
How much can you borrow with a homeowner loan?
So now you understand how homeowner loans work and why you might want one, it’s time for the million-dollar question ‒ how much can you get with one? And inevitably it’s not a question with a straightforward answer.
The reason it’s so tricky to answer is down to the fact there are a few different factors that play a role in determining how much you can borrow with a homeowner loan.
First things first, there are a bunch of different lenders who offer homeowner loans and they all have slightly different rules over the minimum and maximum loans they will offer.
Generally, you can borrow anything from £10,000 up to £500,000, but it’s worth bearing in mind that no two lenders are the same.
How much equity you own
Ultimately the big factor that decides how much you can borrow is going to be how much equity you actually have in your property. Someone who owns their £300,000 property outright can generally borrow more with a homeowner loan than someone with a £500,000 property but who has £250,000 left on the mortgage, for example.
As with a traditional mortgage, lenders will have a maximum loan-to-value they will consider.
OK, time for some more jargon-busting.
The loan-to-value, or LTV, is how the size of the loan compares to the value of the property and is expressed as a percentage.
Now let’s take our two homeowners mentioned above. They both want a homeowner loan of £200,000 to carry out some significant refurb of their property ‒ extension, swimming pool, the works.
Homeowner one owns their £300,000 property outright, so the £200,000 homeowner loan will mean an LTV of 66%.
Homeowner two has a more valuable home, but only has £250,000 equity. As a result that £200,000 loan would mean an LTV of 80%, which may be a little high for some lenders’ tastes.
What can you afford to repay?
While your equity plays a big part in deciding the maximum amount you can borrow, brokers and lenders will also run affordability checks based on your income and outgoings that might affect how much you can borrow.
That means that even if you have a lot of equity in your house, you’ll only be able to borrow an amount that you can afford to pay every month, even if things get a little complicated. (Lenders usually stress-test your income against economic downturns or emergencies, just to make sure that even if things take an unexpected turn, you should be in a good position to make your repayments.)
What are you like as a borrower?
As well as the LTV question, the amount you can borrow will also be influenced by your financial position. Lenders will want to dig into your credit history to get an idea of how reliable you are at meeting your repayments. If you’re the very model of a good borrower, never missing a payment, then they are going to be more comfortable lending to you at a higher LTV.
That is, so long as they think you can afford it. Lenders will want to have a nose at your income and expenditure and then run affordability checks so that they are confident you can afford to make those repayments every month.
How much do homeowner loans cost?
Of course, when you are considering taking out any sort of loan a huge consideration will be how much it’s going to cost you. And when it comes to homeowner loans, there are a few different parts to consider.
Homeowner loan interest rates
Firstly you have the interest rates charged on the homeowner loan itself.
This determines how much the loan will cost you overall and can be either fixed or variable. This is a really important distinction; with a fixed rate ‒ you guessed it ‒ the interest rate is set in stone, so you understand exactly what your monthly repayments will be. That certainly makes budgeting a bit easier.
By contrast, there are also variable interest rates, which can go up or down at any time. This can work out well for you, as if the rate goes down that means your repayments go down, giving you a few extra quid in your bank balance each month. Of course, it can go the other way too, with your interest rate ‒ and therefore your monthly repayment ‒ increasing, leaving you out of pocket.
Crucially, even if you are accepted you might not get the typical interest rate. Lenders advertise an interest rate ‒ known as a representative APR ‒ but only actually have to offer that rate to 51% of successful applicants.
So if you have anything in your credit record that makes the lender a tiny bit nervous, it might approve your loan but push the interest rate up a bit.
Homeowner loan fees
On top of the interest rate, there may also be fees and charges to pay.
For example, if you find your loan through a broker then there may be a broker fee to pay, which is often calculated as a percentage of the total loan. In other words, the bigger the homeowner loan you go for, the bigger the fee you’ll have to pay your broker. Lenders sometimes charge an arrangement fee, too.
It’s also not uncommon for there to be a valuation fee, much like you may have to pay with a normal mortgage, as the lender will want to cast its eye over the property and get an idea of what it’s really worth, and therefore how much equity you actually hold. (However, if you use us to find a homeowner loan, we’ll pay all of your valuation fees, no matter how much they cost. That’s one less to think about, right?)
You may even face charges if you fancy paying the loan off ahead of schedule, perhaps because you’ve come into some money. These are called early repayment charges (ERCs) and are often calculated as a percentage of the amount you borrowed initially.
Before you sign on any dotted lines or agree to any borrowing, make sure you’re fully clued up on all the fees and charges that you have to — or may have to — pay.
How long do homeowner loans last?
A homeowner loan is taken out for a set term, but you have plenty of options when it comes to setting that term.
You could take out a homeowner loan over just a year, or go for the long-term approach and borrow the money over the maximum term ‒ it’s really up to you and what you feel comfortable with.
Of course, the longer the term, the smaller your monthly repayments will be, which can be an attractive idea since it should make managing your budgets easier. But remember ‒ a lengthier term means you’ll be paying interest on that loan for longer, so while the monthly bill may be smaller it will cost you more overall.
Can I get a homeowner loan with bad credit?
You can generally still get a homeowner loan even if your credit record isn’t quite spotless.
Because the loan is secured against your home, the lender has some reassurance that it will get its money back, despite the fact you may have been a less-than-perfect borrower in the past.
If you do have a poor credit record you may have a smaller range of lenders to choose from though, while lenders may also offer you higher interest rates ‒ meaning it costs you more overall ‒ than those offered to borrowers with an excellent credit history.
How quickly can I get a homeowner loan?
This will vary somewhat between lenders. Some are particularly speedy, others are a touch on the slow side. At Loan, we work closely with lenders to make sure everything goes through as quickly as humanly possible for you.
In general, you should get a decision fairly quickly and the money will normally appear in your account within a couple of weeks.
Representative Loan Example:
Based on borrowing £53,590 over 10 years with 120 monthly repayments of £596.09. Annual Interest Rate 6.04% fixed for 60 months, then variable. Representative APRC 7.9%, total amount repayable £71,625. Includes a broker fee of £2,995 and lender fees of £595.