If you are looking to carry out some major home improvements or consolidate a number of expensive existing debts, one of the options you may be considering is a ‘homeowner loan.’
With this type of borrowing, you may be able to get the money you need in your bank account within weeks, rather than having to save up for months (or even years). This can make a homeowner loan seem very appealing.
Here’s a look at how homeowner loans work, including the advantages, disadvantages, plus other potential options.
What is a homeowner loan?
This type of loan shares many features with an unsecured personal loan. You can, for example, borrow a set amount over a fixed term, and then repay the lender in monthly instalments.
But the crucial difference with a homeowner loan is the fact it is ‘secured.’
A homeowner loan may also be known as a ‘second-charge mortgage’ as it’s another loan against your house.
A second charge mortgage enables you to use any equity you have in your property as security against this additional loan.
What are the upsides?
With a homeowner loan, you may be able to borrow bigger sums. You could easily expect to be offered more than £15,000, and even upwards of £25,000 as part of the agreement.
These loans tend to run for longer than personal loans on the whole, ranging from five years up to 25 years, and there are even some longer deals up for grabs. This can be appealing as a longer repayment period translates into lower monthly repayments. The trade-off is that the longer term, the more you’ll end up paying in interest overall.
Another reason why a secured loan may be very appealing is the fact you should be able to get cash relatively quickly and easily. This is likely to be the case even if you have a less-than-perfect credit rating, or if you are self-employed and struggling to get some form of unsecured lending, such as a personal loan.
What rates could I expect?
It depends. What you need to remember is the rate and terms you actually get will be based on your personal circumstances. This includes both your credit score, and the amount of equity you have in your property.
If you have a ‘lower’ credit score, this will translate into higher rates of interest.
And if you only have a small amount of equity in your home, this will limit the amount you will be able to borrow.
What are the downsides?
Crucially, as a homeowner loan is tied to your property, your house is at risk of repossession. In other words, if you can’t keep up with repayments on your loan, you could lose the roof over your head – as you will be forced to sell so your lender can get their money back.
Given what’s at stake, it’s vital that you enter into any secured loan arrangement with your eyes wide open. This means giving careful consideration to the amount you can afford to borrow. If you overstretch yourself, you could find yourself in all sorts of trouble further down the line.
Before entering into any arrangement, it’s important to have weighed up the alternative finance options.
Is an unsecured loan a better alternative?
If you are looking to borrow money, one of the better options may be an unsecured personal loan.
As with a credit card debt, a personal loan debt is not tied to your house or other asset. This means you won’t have to put your home on the line to borrow.
Most personal loans tend to run for between one and five years – though some can be as long as seven years.
With an unsecured personal loan, the amount borrowed is typically between £5,000 and £15,000, though you may be able to borrow more.
While it may sound counter-intuitive, rates tend to get cheaper, the more you borrow. It may be possible to get a personal loan of up to £50,000 from certain lenders. But you need to give some serious thought to borrowing this amount, as this is a huge commitment to take on.
Word of warning on rates
As a borrower, it is easy to get drawn in by low advertised interest rates on loans (both unsecured and secured). While low rates may lure you in, you should be aware that legally, these only need to be given to 51% of successful applicants. This means 49% of people will be offered a higher rate.
As a result, you may find the deal you end up with is not quite as competitive as it first appeared to be.
Carry out a ‘soft search’
When applying for any type of loan, you need to tread carefully, as if you make multiple applications, this could leave a lot of footprints on your credit file. A flurry of searches could give lenders a negative impression of you and make it harder to borrow at competitive rates in the future.
With this in mind, be sure to carry out a ‘soft search’ using a smart search eligibility tool. This will show you which deals you are most likely to get accepted for without impacting on your credit rating.
What are the alternatives?
Remortgage – if you are specifically looking to fund home improvements, you might want to think about remortgaging. This involves you taking equity out of your house to cover the cost of the work, and may mean moving to a new lender. It can be cheaper than taking out a second mortgage, but you should only go down this route if you can be sure the work you are doing will add the same value to your home. Note that it will also take you longer to arrange a remortgage than it will to get a homeowner loan.
Further advance – another borrowing option you might want to look into is a ‘further advance’ from your existing lender. This may be a simpler option than remortgaging, but you will need to speak to your lender to see if this is possible.
A purchase credit card – if you’re not looking to borrow a big sum of money, you may be able to get the cash you need with a credit card. The key is to find a card with a high enough credit limit. It’s worth seeking out a deal offering a lengthy 0% window on purchases. This will give you time to pay off the money you spend. If you meet the eligibility criteria, this can be a low-cost method of borrowing. But it’s imperative you pay off what you owe before the interest-free period expires, as at this point, interest will kick in, and costs can rocket.
A balance transfer credit card – if your main reason for borrowing is to consolidate credit card debt, you may be better off with a 0% balance transfer card. This allows you to switch an existing debt onto a card from a different provider and pay zero interest for a number of months. There may be a balance transfer fee to pay and if you fail to clear the balance within the 0% term, expensive interest will apply.
A money transfer credit card – this works in the same way as a balance transfer credit card but pays as cash into a designated current account which will not charge interest initially. You can then use this cash to fund a purchase or pay off debt. Again, high rates of interest will apply if you do not clear the balance on your money transfer card within the 0% period.