How do homeowner loans work?
To apply for a homeowner loan you need to be a homeowner or hold equity in a property. This is because homeowner loans are secured loans that are secured against your property.
What is home equity?
Home equity is the value of a portion of a property that you truly own if you have a mortgage. An easy way to understand equity is to subtract the amount you owe from the market value of your home.
Assume you purchased a house for £200,000. You put in a 20 percent down payment, which equals £40,000, and got a loan to cover the remaining £160,000. In this case, your home equity is £40,000.
There are two ways you can increase the equity in your home.
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By making your mortgage repayments.
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When the value of your home increases
What can you use a homeowner loan for?
There are a number of reasons people may need to borrow a large amount of money.
One of the most common uses of homeowner loans is for funding home improvements. This could be in the form of improving your kitchen, or adding a conservatory to your home.
A homeowner loan could also be used to consolidate debts in order to lower the interest you pay on that debt. While this may allow you to save money and simplify your finances, it's important to keep in mind the risk you're taking with your home.
What are the main features of a homeowner loan
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You can pay the loan back over 1 to 40 years
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You can borrow up to a set percentage of the value of your property
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You have to pay interest for the duration of the loan term
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You have to pass a credit and affordability check
What are secured and unsecured loans?
What can you use as security?
Homeowner loans use your property as security. You can use almost any type of property as your security, including;
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Houses
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Bungalows
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Flats
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Cottages
How much can you borrow with a homeowner loan?
Lenders currently offer loans of between £1,000 and £2.5 million, but how much you can borrow really depends on the following:
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Value of your property
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Your income
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Your credit record
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Your age and loan term
All homeowner loans set a maximum loan to value, which is the amount of money they will lend depending on the value of your property.
For example, if your home is worth £300,000 and you wanted to borrow £180,000 that would be a LTV of 60%.
If you already have a mortgage you need to deduct the outstanding balance to get your LTV.
For example, your home is worth £300,000 but your mortgage balance is £60,000, leaving you with £240,000 in equity. To borrow £180,000 the LTV would be 75%.
How much do homeowner loans cost?
Like all loans, the cost of a homeowner is determined by the interest rate, but you also need to watch out for any fees charged on top of that.
Interest
Interest is charged for the duration of your loan and added automatically to your payments.
To get the cheapest loan you need to look for the lowest interest rate you can find.
The type of interest rate you choose has a bearing on the overall cost:
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Variable interest rates could change over time but are normally a little cheaper to start with.
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Fixed interest rates stay the same for the duration of your loan, but the initial rate may be slightly higher to start with.
Most lenders offer variable rates and fixed rates are much less common.
Fees
Not all secured loan lenders charge fees, but you need to check carefully so you do know what you are paying. Fees to watch out for include:
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Valuation fees
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Legal fees
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Disbursement fees. e.g. land registry searches
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Broker fees
Getting the best homeowner loan
Most secured loans are only available through a broker, so to get the best loan you need to:
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Decide how much you need to borrow: Work out exactly what you need to borrow. If it is less than £25,000, you could consider an unsecured loan.
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Work out your loan to value: You will need an accurate valuation of your property and to know the outstanding balance on your mortgage if you have one.
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Choose your loan term: Work out what monthly payments you can afford and estimate how long you need to pay back your loan.
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Check your credit record: Make sure there are no mistakes on your credit report and check if you have a good, fair, or poor credit rating.
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Speak with a secured loan broker: They take your information and search the market for the best-secured loan for your circumstances.
What happens after you've applied for a homeowner loan?
Once you've chosen a lender and applied for the loan you want, the lender will then do some checks before you get your funds. These include:
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Checking your credit record
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Checking your income and recent payslips
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Checking the housing registry to confirm you own the property
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Checking the value of your property and your equity
This process normally takes between 3-5 weeks after which the money will be transferred into your chosen bank account.
Paying back your loan
Most homeowner loans require you to pay monthly installments by direct debit, but if you would prefer to pay using a different method speak to a broker before you apply.
What if you want to move house?
If you want to move home but have an outstanding secured loan you have three options:
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Transfer the loan to your new property: Some lenders will let you move your loan to your new property, but you usually have to pay a fee to do so.
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Use the money from the sale to pay off the loan: Check this will leave you with enough money to buy your new property, or for a deposit on your new home.
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Borrow money to pay off the loan: If selling up does not leave you with sufficient funds, you could borrow to pay off your loan, but this may affect your mortgage affordability.
Remember, if you choose to pay off your loan you may have to pay an early redemption charge.