Wondering if your homeowner loan could affect your mortgage offer? Well the answer is it shouldn’t – but it probably will affect your move.
That’s because you will have to pay off your homeowner loan when you sell the property it’s secured to. This means you’ll have less money to use for your deposit and moving costs than you thought.
Find out more by reading on.
Secured to your current home
A homeowner loan, or secured loan, is so-called because it’s secured to your home. The property provides an extra layer of security to your lender, as if you stop making your loan repayments and fail to come to a new agreement with them, they have the right to repossess your property to get back what you owe them.
One of the things that affects how much you can borrow with a homeowner loan is the equity you have in the property. The more equity you have, the better the deal you could get.
Your equity is how much is left when you subtract your outstanding mortgage balance from the value of your property. For example, if your home is worth £200,000 and you owe £150,000 on your mortgage, your equity is 25% and your loan-to-value (LTV) is 75%.
"A loan-to-value of 60% or less should net you the best deal."
Usually, the best deals on remortgages and secured loans are available to people with a loan-to-value of 60% or less. This would mean the owner has equity equal to at least 40% of their home’s value.
The reason that homeowner loan providers are keen for borrowers to have as much equity as possible is that it’s from this pot that they’ll be able to claim back what they’re owed if you default on your loan.
If you stop making your repayments and a repossession goes ahead, the first lender to be paid will be your mortgage provider. Once they receive what they’re owed, what’s left will go towards clearing your secured loan balance.
If there’s anything leftover once both your lenders have been repaid, it will go to you. However, if there’s not enough left once your mortgage is paid off to clear your homeowner loan, you will still be in debt to this lender. There’s a greater risk of this happening if you don’t have much equity in your home, which is why lenders offer their best deals to people with the most equity.
Applying for a mortgage
So, what does this all mean if you’re thinking of applying for a new mortgage and moving house? Well, unlike with a personal loan, a homeowner loan won’t affect your mortgage application. This is because you will need to pay it off when you sell the home upon which it’s secured.
So, you don’t need to worry about the repayments being included as one of your monthly outgoings when the lender you apply to runs its affordability checks. Because you’ll clear the loan with the proceeds raised from your house sale, you’ll no longer have to make these repayments.
What will be affected is how much you can borrow. Let’s say your house is worth £100,000 and you have £50,000 left on the mortgage. This would appear to give you a very attractive LTV of 25%, meaning you own 75% of the equity.
"There may be a charge for repaying your homeowner loan early."
However, if you have a homeowner loan secured to the property with an outstanding balance of £25,000, part of the proceeds of your house sale once the mortgage is cleared will be used to pay this off. Your mortgage balance plus your secured loan balance leaves you with an LTV of 37% and equity of just over 60%.
This is still pretty good, but it does mean you have less equity in your home than you may have thought. As your equity – among other things – will help determine how much you can borrow with your new mortgage, your homeowner loan will affect your application, however indirectly.
And if your outstanding mortgage balance and secured loan leave you with very little equity in your home, it may be best to wait a while before you make plans to move. By clearing as much of your debt as possible, you’ll improve your LTV and open yourself up to better mortgage deals.
Keep in mind there may be a charge for repaying your homeowner loan earlier than the term you agreed with your lender. You’ll need to pay for this from the proceeds of your property sale too.
If you don’t have any equity in the property, there may be some lenders who agree to you transferring the loan to your new property. There may be a fee for this, though, and it could also depend on the loan-to-value of your new home.
We hope this has answered the question of how your homeowner loan will affect your mortgage offer. For the answers to more commonly asked questions about mortgages and borrowing, visit us again soon.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.