Homeowner loans can offer you a cash lump sum to consolidate your existing debts, pay for an extension or buy a new car, among other things.
But how exactly does it work? If you’re thinking of taking out a homeowner loan (also known as a secured loan), it’s important you know the answer to this question. Read on to learn more.
Secured to your home
A homeowner loan is secured to your property. This means that if you were to stop making your loan repayments, the lender can repossess your home in order to get back what you owe them.
Because of this security, a homeowner loan can provide you with more money at a lower interest rate than you might be able to get with a form of unsecured borrowing, like a personal loan. This means that a secured loan is suited to projects and purchases where you want to spread the cost over a long period to keep the repayments manageable.
Be aware that because your homeowner loan repayments are spread across a longer timeframe, you may end up paying more interest overall. However, it’s because your repayments are spread out that they can be more affordable, so paying the additional interest may be something you’re willing to do in return for this.
Another advantage of homeowner loans if you’re weighing up borrowing options is that if your credit history isn’t perfect, it could provide you with a more affordable way to borrow than an unsecured personal loan.
Unsecured lenders will look at your credit history to see how well you’ve managed your borrowing in the past, and, if you’ve struggled, they may charge you more interest or turn down your application altogether. Because with a homeowner loan they have your property as security, you may get a more favourable rate on a secured loan if your credit history isn’t strong.
A mortgage behind a mortgage
The best way to think of a homeowner loan is as a second mortgage that sits behind your first one. While your first mortgage always takes priority, a homeowner loan is also secured against your property.
If you stop making your loan repayments, as a last resort your secured lender can repossess your home to sell and make back the money you owe them. They don’t even need to have the permission of your first mortgage provider to do this.
In this situation, your mortgage lender will be prioritised, so even though it is your secured lender who has repossessed your home, your mortgage provider will be paid first.
After your mortgage provider has been paid, your secured lender can take what they’re owed from the money that’s left. What’s left over from this is yours.
If, once your mortgage has been paid off, there isn’t enough money left from the sale of your home to clear the balance of your homeowner loan in full, the lender is entitled to come after you to reclaim what’s outstanding.
How much can I borrow?
If you decide to go ahead and apply for a homeowner loan, the amount you can borrow will depend on your income and how much equity you have in your home. This is the sum that’s left when you take away the outstanding balance of your mortgage from the current value of your property.
The balance of equity you have in your home is known as the loan-to-value. The more equity you have in your home – or the lower your loan-to-value -, the more likely it is you’ll be offered a favourable rate by the lender. The best deals are usually available to homeowners with a loan-to-value of 60% or less.
Your income and outgoings will also be considered when you apply for a homeowner loan. Lenders want to see that you have enough coming in each month to comfortably cover your loan repayments along with your other financial commitments, like your mortgage, utility bills and other credit agreements.
By using Ocean’s Smart Search, you can find out if you’re eligible for a homeowner loan before you apply – and it won’t affect your credit score. Why not give it a try?
We hope this blog has cleared up any questions you had about how homeowner loans work.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.