Homeowner loans are a type of secured loan that you can take out against the equity in your house to provide you with extra credit, usually at a lower interest rate than personal loans or credit cards. You should seriously consider them if you want to avoid making changes to your mortgage that could potentially affect your credit score.
What is a homeowner loan?
Homeowner loans are a type of loan that lenders secure against your property separate from your original mortgage. Typically, homeowners use them to raise funds for home improvements or securing other debts.
The amount you can borrow depends on the lender’s policies. Some lenders may let you take out loans against your home up to 95 percent loan-to-value (LTV) ratio, while others could limit this to 85 to 90 percent, depending on your current debt burden.
Be warned – if you don’t pay back a homeowner loan, your home may be repossessed. Therefore, think carefully before securing the loan against your property.
How do you get a homeowner loan?
In principle, homeowner loans are similar to conventional mortgages. Banks and building societies in South Wales secure both types of lending against your property and then ask you to repay it, usually over a period of 35 years.
Lenders typically offer loans between £10,000 and £500,000, with some specialising in the top end of the market, offering even bigger loans. However, to qualify for these, you will need to provide evidence of income and your credit history.
When signing up, lenders will begin by asking you what you want to use the money for. This sometimes determines how much they are willing to lend.
They will then set an interest rate based on the level of risk you pose. If you have bad credit or existing debt against your home, your monthly repayments will be higher. However, as long as you make monthly payments on time, you will keep your property.
What are the benefits of a homeowner loan?
If you don’t want to change your mortgage, taking out a homeowner loan that you pay back separately can be beneficial. Here’s why:
Keep your low mortgage rate
Firstly, homeowner loans let you keep your borrowing costs low. Fixed-rate mortgages are currently the lowest they have been on record, allowing homeowners to afford bigger properties. However, the Bank of England has recently threatened to raise rates, putting remortgaging homeowners at risk of higher interest charges.
Applying for a homeowner loan sidesteps this issue. It lets you leverage the equity in your home without risking any change to your rates.
Avoid early repayment charges
If you decide to leave your mortgage early, some lenders will apply early repayment charges. You have to pay these penalties on top of any interest fees you owe before the bank lets you switch to a new mortgage product. Therefore, you could be better off raising funds through a homeowner loan lender, authorised and regulated but Financial Conduct Authority.
Keep your interest-only mortgage deal
In addition, rules for interest-only mortgage deals tend to be quite strict, and lenders may not let you increase the loan amount. However, they may let you take out a concurrent homeowner loan because you pay back the principal.
Get credit even if you have credit issues
Lastly, other forms of lending can be expensive if you have credit issues. However, because banks secure homeowner loans against your property, it reduces their risk, letting them charge lower rates.
Homeowner loans tend to be significantly more flexible than regular mortgages, too. You can usually still access it even if you have bankruptcy, CCJs or debt management plans on your record.
What are the disadvantages of homeowner loans?
Of course, it’s not all good news. There are some downsides to taking out a homeowner loan, too.
The impact on your credit score if lenders reject your application
If you apply for a homeowner loan and you are not successful, it can have a negative impact on your credit rating. This, in turn, can increase the cost of borrowing elsewhere.
Most people take out fixed-rate mortgages to hedge against future interest rate hikes and keep their monthly bills predictable. However, homeowner loans can be variable, meaning the total repayable amount could be significantly higher. If rates do increase, which looks high. likely in 2022/2023, then make sure that you can afford higher repayments.
The bottom line
Most people can get homeowner loans in as little as two to four weeks. The interest rate you’ll pay depends on your credit profile, personal financial circumstances, and how much equity you have in your property. It can be a great way to free up cash for home improvements or debt consolidation.
Risk of home repossession
When you sign up for a homeowner loan, you risk your home.
Lenders can seize your property and sell it to the highest bidder to recoup their losses if you cannot repay your debts. Falling into just three months of arrears can be enough for them to trigger the repossession process in cities like Cardiff and Swansea.
If you have a property that is causing you issues, contact Mark King Properties today on 02920 501 001. We buy any house in any condition here in South Wales.