In this financial climate many of us are feeling the squeeze and a line of credit is not always easy to obtain. Lenders are becoming more cautious, interest rates are still high and disposable income is at an all-time low.
If you are self-employed, on low-income, have CCJs or a bad credit history, you may struggle to find an unsecured loan.
So how does a homeowner loan differ from a regular unsecured loan, and is it for you?
Unsecured loans will depend heavily on your employment or income status. You have to show that you have a regular income that will cover the cost of your monthly repayments after your outgoings have been taken into account. The interest rate will be higher and the lender will want the loan repaid within a certain time frame. If you have low income, poor credit history etc. you may find yourself pushed to accept a very high interest rate on an unsecured loan, assuming you get accepted in the first place.
A homeowner loan will also take your income , outgoings and credit history into account but also considers the value of your home. How much is your home worth? How much equity do you have in it? This is important. If your home is worth £350,000 but you owe £300,000 on the mortgage your equity is only £50,000. However a £250,000 home with a mortgage of £75,000 left to clear will give you equity of £175,000. The equity will ultimately decide how much risk the lenders are willing to take with your loan.
A homeowner loan can be for much larger sums with a much longer period in which to pay, e.g. some banks are offering up to £250,000 over 25 years. The interest rate is usually lower than on the unsecured loan because it is secured against your property. This means that if you stop paying, the lender can force the sale of your house to pay them back in full.
There are a couple of things to consider before you decide if a homeowner loan is right for you:
- If you share ownership of your home, or are married, then both parties will need to apply for the loan. Both parties will share the risk of losing the property if payments are not made.
- The repayment amounts are usually fixed so you need to ensure you have budgeted for this amount each month. Payments often aren’t flexible so check your lenders policy before you sign up if you anticipate needing a “holiday” period.
- The term of the loan is usually fixed and an early repayment may incur a penalty charge. This varies so do check with your lender.
- If you move house you will have to repay the loan in full and then see if you can take out a new loan on the new home dependent on your circumstances (change in equity etc.)
You could lose your home if you don’t keep up with all the payments.
One final thing to clarify and consider; A homeowner loan is not the same as a remortgage. You are not going to move to a new lender, incurring hefty fees, valuation costs and renegotiating rates and terms etc. This is especially useful if you have been able to get a good deal on your mortgage in the first instance. A homeowner loan lets you stay with your initial mortgage provider while taking out an additional loan with a secondary lender.
There are many comparison websites and “loan calculators” available online to help you decide if a homeowner loan is for you. There are many benefits to be had but ultimately, as your home is at risk, it is very important that you shop around for the best deal available and ensure you are going to be able to make those payments.
Robin Marrow shares his expertise on personal finance, secured loans and mortgages as an author and technical reviewer for many finance publications and blogs. His articles can be found on homeownerloans.org.uk .