Homeowner Loans explained
If you're a homeowner and you want to raise some cash you may consider taking out a homeowner loan – also known as secured loans or second-charge mortgages. Read on to find out more.
Homeowner loans – also known as secured loans or second-charge mortgages – allow you to borrow money using your house as security. They’re common for people who want to borrow more without remortgaging or extending their mortgage. Here we look at how homeowner loans work, how much you can borrow, the pros and cons, how to get one and what the alternatives are.
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. And with secured homeowner loans, most lenders typically 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 and 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.
However 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. But homeowner loans do come with the risk of repossession if you fall behind on repayments. One popular reason why people are taking out homeowner loans at the moment is if they’re mid way through a mortgage deal and want to borrow a lump sum so they can consolidate their debts.
How much I borrow?
When it comes to secured homeowner loans, how much can be borrowed? Lenders typically offer secured homeowner loans for between £10,000 and £500,000. However, the amount you’ll be able to borrow on a homeowner loan will depend on your circumstances, such as how much equity you have in the property you are securing the loan against. But you can usually borrow more on a secured homeowner loan than if you were remortgaging or borrowing more from your existing mortgage lender through a further advance.
What can secured loans be used for?
Secured homeowner loans can be used for a broad range purposes including:
- Funding home renovations and improvements
- Debt consolidation
- A deposit for additional property purchase such as a buy to let or a holiday let
- To pay a tax bill
Second charge mortgage 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.
Is a homeowner loan right for me?
Before you go ahead with this type of loan you’ll want to make sure it’s the right option for you. If you speak to a broker that only offers secured loans, then naturally that’s what you’ll be offered. But if you speak to our partners at Chartwell Funding, they’ll look at other options that may be better for you first. For example, you may be able to remortgage with a new lender and borrow the extra funds you need. This is generally the cheapest way to raise funds.
Another option that may be better for you may be taking out additional lending with your current mortgage 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.
However, if a homeowner loan looks like the best option for you they can find you the best one for your needs.
What’s the process?
If you’re considering a secured homeowner loan you’ll probably already be familiar with how getting a mortgage works. But with second charge mortgages, what’s the process?
- Shop around
As we explain above, the first step should be finding out whether a homeowner loan is the best option for you and if it is, make sure you find the best homeowner loan deal by speaking to our partners at Chartwell Funding.
- Decision in Principle
Then, if you’re happy to proceed the next step is for your adviser to secure your Decision in Principle. Next, just like with a mortgage, once this is secured, your adviser will prepare your application. You’ll need to provide documents like your bank statements and payslips.
- Your application will be considered
Once they receive your application the lender will check the information and documents you’ve provided. They’ll also instruct a valuation of the property to ensure it’s adequate security.
- You’ll get an offer
Assuming the lender accepts your application for your secured homeowner loan, they’ll send you an offer. They’ll also send a copy to your broker too.
- Completion
Once you’ve signed the paperwork for your secured homeowner loan, you and the lender will arrange a date to drawdown the money – this is called completion.
Moving house with a homeowner loan
If you sell your house, you’ll need to pay off your second charge mortgage unless the lender allows you to transfer the second mortgage to a new property.
Advantages of homeowner loans
This type of 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 second charge mortgage 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 current mortgage rate
If you’re on a low mortgage rate, by taking out 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 second charge mortgage, 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. Second charge mortgages 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.
These loans also allow you to borrow larger sums of money than you could secure with a personal unsecured loan.
Disadvantages of homeowner loans
Fees
When you’re looking at homeowner loans, beware as some specialist brokers charge fees of up to 12.5% of the loan amount to advise on and arrange a loan for you. This is a huge fee and if you add this to your loan the amount you’ll repay over the lifetime of the loan will be a significant amount. That’s why we have partnered with Chartwell Funding who charge a fixed fee of £500 to provide advice and arrange a homeowner loan for you.
Repossession
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.
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.
Variable rates
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.
How to get a homeowner loan
It is possible to search and find these 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.
How long does it take to get a homeowner loan?
With improvements in technology and no standard legal work, these loans can be as quickly as within four weeks. But to get it done quickly you’ll need to make sure you’re quick at pulling together all the documents you need. Mortgage valuations are causing some delays at the moment if a physical inspection is required. However in most cases mortgage valuations are done at the ‘desk top’ which means the process is much quicker.
Read more in our guide on mortgage valuations.
What are the alternatives?
As well as remortgaging with a new lender and taking out additional borrowing with your existing lender, are there any other alternatives to a homeowner loan? You may consider 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.
Frequently Asked Questions
Are homeowner loans easy to get?
Yes, it can be easier to get accepted for a secured loan, as opposed to an unsecured loan, especially if you want to borrow a larger amount of money or have adverse credit. It’s a good idea to speak to a specialist broker to find the best loan for you.
What do you need to get a homeowner loan?
Firstly you’ll need to own a property, as the equity will be used as security. And when you apply for a secured loan you’ll need to provide proof of identity, address and income (either three months of payslips or recent accounts). You’ll also need to provide your annual mortgage statement. In addition, you must notify your lender.
Is a homeowner loan the same as a mortgage?
No. A homeowner loan is taken out alongside your first mortgage, but the two are separate. As with a regular mortgage, it is secured against your property. However, a homeowner loan is a second-charge mortgage which sits behind your original mortgage. If your property were to get repossessed, your mortgage lender would be repaid before any money went towards paying off the loan.
Is a homeowner loan cheaper than a personal loan?
Typically yes. It’s usually a cheaper way to borrow than taking out an unsecured personal loan because there is a lower risk for the lender. Also you may be able to borrow a bigger sum of money with a homeowner loan than you could with a personal loan. But speak to a homeowner loan specialist for advice.
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