Homeowner Loans explained
A homeowner loan - also known as a secured loan or second-charge mortgage - allows you to borrow money using your house as security. They’re common for people not wanting to change their mortgage deal to extend their lending. Here’s how homeowner loans work, the pros and cons and how to get one.
What is a homeowner loan?
A homeowner loan is exactly as the name suggests – a loan that is secured against a property (residential or buy to let) and is separate to the original mortgage.
Commonly known as second charges or secured loans, homeowner loans are typically used to raise funds for home improvements, debt consolidation, business purposes or a deposit for another property when your mortgage lender cannot help.
How does a homeowner loan work?
A homeowner loan shares many similarities with a regular mortgage in that it is a loan secured against the equity in your property and is repaid over a term of up to 35 years.
Most lenders offer loans for between £10,000 and £500,000.
A lender is likely to want to know what you want to use the money for.
As with other types of loans, you’ll make monthly repayments to pay back what you owe, plus any interest. The interest rate is set at the outset and may be either fixed or variable depending on the loan you choose.
In using your home as security, the lender can sell your property if you don’t keep up with repayments, as a way of getting their money back. As long as you make the monthly repayments on time and in full, you won’t lose your home.
A homeowner loan is secured behind your original mortgage and would be repaid after the mortgage in the event of a repossession.
Are homeowner loans a popular option?
Homeowner loans or second charge mortgages, have been a feature of the lending landscape for some time. They are often used to raise money for home improvements or to consolidate debts. But homeowner loans do come with the risk of repossession if you fall behind on repayments.
According to the Finance and Leasing Association (FLA), new second charge mortgage business volumes grew by 59% in February 2022. 2,660 new agreements were made, the highest volume in two years.
Advantages of homeowner loans
A homeowner loan is particularly beneficial for homeowners who are unable to extend their current mortgage, or where it is not favourable for them to do so.
Here are a few examples of when a homeowner loan may be preferable to remortgaging:
Avoiding large early repayment charges
If you need to raise funds but are midway through your current mortgage term, there may be an early repayment charge to change lenders and extend your borrowing. It may be more cost effective to raise the new funds you need through a homeowner loan to avoid the charge and then review your options again towards the end of your current mortgage deal.
Retaining your historic low mortgage rate
You may have been lucky enough to have secured an excellent lifetime tracker deal and do not want to lose the rate on the main mortgage, but still want to raise funds. Many lenders are trying to wriggle out of these deals and expect you to change product if you want to make changes to the original loan. With a homeowner loan, you can continue with your current mortgage product and simply raise the funds on separate terms.
Holding onto your interest-only mortgage deal
Over the years there have been numerous changes in the qualifying criteria for interest-only mortgages. You may find yourself unable to raise further funds on your original deal and maintain your current interest-only arrangement. With a homeowner loan, you can keep the original mortgage as is and raise the additional funds separately to maintain affordability and flexibility.
Alternative if you have credit issues
As mortgages are long term commitments, sometimes you can find that your credit profile has deteriorated over time and when you want to remortgage or raise additional funds, you no longer meet your existing lenders credit profile criteria. Homeowner loans have more flexible criteria than standard mortgages. So, you may be able to find solutions even with credit issues, such as low credit scores, CCJs, defaults, debt management plans and bankruptcy.
Homeowner loans also allow you to borrow larger sums of money than you could secure with a personal unsecured loan.
Disadvantages of homeowner loans
Historically, second charge loans were complicated affairs and specialist brokers were required to help you. Fortunately, these days homeowner loans are more simple to arrange. But you can expect to pay similar fees to those on a mortgage (arrangement fee, valuation fee etc). Generally, there are no legal fees to pay unless you are changing the ownership of the property or paying off other secured debt. But always check the fees. For smaller loans, fees can dramatically affect the APR you pay on the loan.
Early repayment fees
Some lenders may charge a penalty if you repay the debt early (because they will not be earning the interest they expected). The fee will vary between lenders and products.
Low advertised rates
Watch out for low rates which aim to lure you in.
With variable rate homeowner loans your repayments can go up or down depending on the Bank of England base rate. This can make it difficult to budget. Make sure you can easily afford your monthly repayments if they were to increase.
Impact on your credit file
If you apply for a loan and are unsuccessful or you decide not to proceed, there may be a credit search recorded on your file. However, the impact of one credit search on a file is minimal and will not affect you applying for any credit in the future. If you are declined for a loan, this is not recorded; just the credit search.
The biggest risk of a homeowner loan is falling behind on your repayments and the lender repossessing your home to repay the debt. This is why you should also consider the risks if you are securing unsecured debt to your property.
How to get a homeowner loan
It is possible to search and find homeowner loans through comparison websites or direct with a lender. But, we would always recommend speaking to a specialist broker to ensure you are receiving the correct advice.
Any broker with the relevant Financial Conduct Authority (FCA) registration can help you arrange a homeowner loan. But you will be charged. Some specialists charge fees of up to 12.5% of the loan amount to advise on and arrange a loan for you. So we have partnered with Chartwell Funding who charge a fixed fee of no more than £500.00 to provide advice and arrange a homeowner loan for you.
To get a homeowner loan you’ll need your latest three months’ payslips, or a recent set of accounts, and your annual mortgage statement. You will also need to provide proof of identity and address.
How long does it take to get a homeowner loan?
With improvements in technology and no standard legal work, arranging a homeowner loan can be as quick as a week. However, you should allow between 2 and 4 weeks to arrange and complete a new loan.
Homeowner loan interest rates
Homeowner loans are deemed higher risk to lenders as they get repaid after the original mortgage. They, therefore, attract higher interest rates. However, they typically have more competitive rates than you would get if you took out an unsecured personal loan.
Homeowner loan interest rates, as well as, the amount you can borrow and the repayment term available are dependent on:
- overall loan to value of the property (how much equity you have)
- your credit profile
- your personal circumstances
With some lenders, the interest rate can change with the amount that you want to borrow.
Homeowner loans, much like standard mortgages come in a range of products. These are split into fixed rates and variable rates. You can normally decide to take either a 2, 3 or 5 year product depending on what best suits your circumstances.
Some homeowner loan fixed rates also have the advantage of not having any early repayment charges. This means you can pay off your loan at any point.
What are the alternatives to a homeowner loan?
- Remortgage to a new lender. If you are paying your lender’s standard rate or are coming to the end of your current product, you may be able to remortgage to a new lender and borrow the extra funds you need. This is generally the cheapest way to raise funds.
- Additional borrowing with your existing lender. If you are midway through a product, you may be able to raise funds with your existing lender through a further advance, depending on affordability, loan to value and credit score.
- Unsecured credit, like personal loans or credit cards. As these are higher risk to lenders than a secured loan, the interest rates will be higher and the repayment terms shorter, thereby making the monthly repayments higher. They can be useful if you know your borrowing is only temporary or for borrowing smaller amounts.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY DEBT SECURED ON IT.