The pros and cons of homeowner loans

Homeowner loans can be a good way of borrowing large amounts with lower interest rates, even if you have a poor credit history. However, it’s important to be aware that the loan is secured against your home, so there’s a risk of losing your home if you fall behind.

6 min read
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What is a homeowner loan?

A homeowner loan (also known as a ‘secured loan’) is a loan specifically for people who own a home, as the name suggests. A homeowner loan is secured against your property and can be used to borrow larger amounts with lower interest rates. This is why they tend to be used for expensive projects like home improvements.

As homeowner loans are tied to your home, it can be used as collateral in the event of you failing to repay the loan. While this is generally only ever done as a last resort, it is still an important risk to be aware of. So, it’s essential you consider carefully whether a homeowner loan is right for you before you apply.

The pros of homeowner loans

When used sensibly and effectively, homeowner loans can be a great way of borrowing money to pay for home improvements or even debt consolidation. Here are some of their main advantages.

1. You can borrow more  

Lenders often consider homeowner loans to be less of a financial risk to themselves. This is because they know they can recoup their costs from the sale of your home in the event of you being unable to repay the loan. As a result, they tend to be more willing to lend much larger amounts, compared to unsecured loans.

Exactly how much you can borrow depends on the lender’s criteria. Each lender is different, but they normally consider: 

  • your income and outgoings (which affects your affordability for a loan)
  • your credit score and credit history
  • your age (some lenders have age restrictions)
  • how much equity you have in your house (i.e., how much you own outright).

The more equity you have, the more you may be able to borrow. To work out your equity, simply deduct how much you have outstanding on your mortgage from the value of your house (you can find an estimate of this on Zoopla, if you’re not sure).

2. Interest rates tend to be lower 

As secured loans carry less risk for the lender (as we mentioned above), it means that lenders are often willing to offer lower interest rates compared to unsecured loans - even on large amounts of money.

It’s important to remember, though, that interest rates will always depend on your personal circumstances, as well as your lender’s criteria.

3. You can spread the repayments  

Homeowner loans also allow you to spread the repayments over longer periods of time than you can with unsecured loans, which can make your repayments more manageable. Having all your monthly repayments replaced by one, affordable repayment can alleviate lots of financial stress and help with budgeting.

It also means you can afford to pay for an expensive home improvement upfront and then pay it back later, over an agreed timeframe. This may be preferable to saving up for something over several years if you need to make the updates straight away. 

4. You don’t need a perfect credit score   

Homeowner loans can also be a good option for those with a less-than-perfect credit score. Where your chances of approval for unsecured loans can depend heavily on your credit score, this isn’t necessarily the case for homeowner loans.

This is because, with homeowner loans, some of the risk in lending to you is mitigated by the fact the loan is secured to your property. As a result, secured lenders are often more willing to lend to those with lower credit scores, compared to unsecured lenders. There are also homeowner loan lenders who specialise in providing finance to those with bad credit.

5. You can improve your credit history 

Homeowner loans can also help improve your credit score - as long as you make your repayments in full and on time, every time. It won’t happen overnight, but over time you’ll see your credit score climbing.

Read on to find out how long it takes to improve your credit score.

The cons of homeowner loans

There’s no doubt that homeowner loans can be a good option for borrowing for some, but that doesn’t necessarily mean they’re the right option for you. As with any kind of credit, they come with their own set of disadvantages – here are some of the main ones.

1. Your property could be at risk if you don’t pay 

While securing a loan to your home offers some key benefits (such as being able to borrow large sums with potentially lower interest) it also comes with a hefty amount of commitment and a chunk of risk. When you take out a homeowner loan, you agree for your home to be used as collateral if you cannot repay the loan. While this is usually only used as a last resort, it is still a risk to consider.

It’s also important to remember that, homeowner loans can last for many years. If your circumstances change to the point that you cannot make your repayments, your home could be at risk. So, homeowner loans shouldn’t be undertaken lightly. Here at Ocean, we have qualified advisers who can guide you through the process.

2. Early repayment charges may apply 

If you find yourself in a particularly fortuitous situation and you can repay your loan early, you could be faced with charges for doing so. Lenders do this to offset the money they may lose in interest if you repay the loan early. So, you should always check the terms and conditions for details of early repayment charges before you agree to your homeowner loan.

3. A longer loan term means you’ll pay more interest overall 

While the interest rates of homeowner loans can often be lower than those for unsecured loans, you could end up paying more interest in total the longer your loan term is.

4. You need a high credit score for the lowest rates 

While you may still be able to get a homeowner loan if you have a poor credit history, you’re still only going to get the best rates if you have a good credit score. If you end up paying a high interest rate on a large sum over a long period of time, the cost of your borrowing could be substantial. So you may wish to work on improving your credit score before you apply

5. Your credit history may be negatively impacted  

Every time you make a credit application, the lender will conduct a hard search on your credit report, which leaves a mark and temporarily lowers your score. They carry out a credit check to review your credit history. This helps them to assess the risk in lending to you, based on your financial past.

If you apply for lots of credit at once, your score will be damaged further, so it’s best to space credit applications (of any kind) apart by around at least three months.

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Homeowner loans are secured against your home.