Most of us have mortgages on our homes and from time to time additional borrowing may be needed. If you want to borrow more than £5-10,000 then it’s likely that a loan or mortgage linked to your property could be the cheaper option.
These loans can be for all sorts of reasons but the majority are either to pay for some home improvements or an extension, or the money is used to consolidated existing unsecured debts such as loans, HP and credit cards.
Often you can borrow this money from your current lender, but occasionally this is not possible. This is where a homeowner loan can be useful, it is a secondary loan, provided by a new company, that is secured against your home, like a mortgage.
Homeowner loans explained
A secured homeowner loan allows you to borrow a lump sum against your property, separate to your main mortgage. It is sometimes called a secured loan because it is a loan that is secured against your property (like a mortgage).
They are only available to home owners who have built up some equity.
When a loan is secured it gives some extra security for the lender and this means that they can offer larger loans which are repaid over longer periods of time.
What is a secured loan?
A secured loan is very similar to a mortgage and some are referred to as second mortgages.
A loan will be called secured when the lender takes a legal charge over your property as extra security. This is mainly because these types of loan can be for quite large sums, anywhere from £10,000 to £1 million. As the lender has a second charge on your property they would be able to repossess your home in the event that you default on the repayments.
Secured loans are taken out in addition to a main mortgage, which will hold the primary first charge.
They are often cheaper than an unsecured loan (which does not require any security) and many lenders will accept borrowers who have bad credit or a poor credit score. They can also be set up relatively quickly, which can help if you need some fast money.
Who are they suitable for?
Homeowner loans are suitable for a property owner that wants to borrow more money than an unsecured loan could provide but are unable to obtain this from their main mortgage lender.
The reasons for this can be varied but would include:
- the current lender declining an application due to affordability
- insufficient equity for the lender
- recent poor credit
- avoiding large repayment penalties
- changes in occupation or employment
Some people take out a secured loan instead of remortgaging because they currently have a great interest rate deal or to avoid early repayment fees. It could also be that their lender is not willing to lend anymore money.
It’s important to remember
Borrowing in this way uses up some of your equity and puts your home at risk. As homeowner loans have second charges they are more expensive that a standard mortgage.
It’s important to properly check the costs of remortgaging against taking on a home-owner loan. An independent mortgage broker will be able to help you with this.
Second Charge Mortgages
Specialist secured lending
Who is eligible?
To be eligible for a home owner loan you will need:
- To be a homeowner
- Have home equity
- Earn enough to cover the repayments
All lenders will have their own criteria but they will need to check your income and outgoings to make sure that the new loan is affordable.
Importantly you also need to have enough equity in your home to borrow against. You can’t borrow all of the equity as you would then have 100% lending and nil equity.
Lenders will differ on loan to value (LTV) limits but loans are generally available up to 90% LTV which will include the amount you already owe. The more equity you have, the larger the amount you could potentially borrow.
Your current mortgage lender will also need to give their permission for this secured loan/second charge to be approved.
These lenders can be flexible with their criteria and are very experienced in dealing with borrowers with self-employed income, low credit scores and poor credit.
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Check your credit report
Homeowner loans are popular with borrowers who may have a low credit score or perhaps have picked up some bad credit.
These lenders are more willing to take a risk as they can repossess your home if things go wrong and they receive a slightly higher interest rate if things go right!
Before applying for any loan it’s a good idea to request a copy of your credit report to look for any possible problems. Your mortgage broker can help you with this.
How does a homeowner loan work?
A homeowner loan is a form of secured loan, or second charge mortgage. They are often used to borrow money for home improvements, major purchases and debt consolidation but the money can be spent anyway you want.
A homeowner loan is taken out in addition to your main mortgage, which remains in place. Your existing lender will need to formally agree that this is OK.
The amount you can borrow will depend on your equity and financial status. Loans are available from £10,000 to £1 million, up to 90% loan to value, including the first mortgage.
When you apply you will need to provide proof of ID, bank statements and proof of your income. The lender will do the normal checks including looking into your credit history.
If your application is approved you will pay the loan back monthly, and these payments will be separate to your existing mortgage. It’s important to remember that this type of secured loan reduces the available equity in your property.
Not on the High Street!
The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Second Charge Mortgages
It’s important to get expert advice when taking out a second mortgage as there are a lot of things to consider.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Complex Mortgages
A complex mortgage could be considered any situation that does not fit with the standard lenders. Typically this would be borrowers who have multiple income streams and/or properties of non-standard construction.
What is home equity?
Mortgage lenders and brokers talk a lot about home equity and loan to value (LTV). You can only apply for a homeowner loan if you have enough equity in your home.
But what exactly is home equity?
Home equity is the part of your home that you own outright. So if you have no mortgage you own 100% of the equity in your home. Secured loans and mortgages will reduce this percentage.
If you have a repayment mortgage then your equity will increase each year as the mortgage balance decreases.
Home equity = Property value – secured loans and mortgages
How much can you borrow?
The amount that you will be able to borrow differs for each person and is affected by their income and available home equity.
Lenders offer loans from £10,000 to £1 million, but you need to qualify for the loan based on your own personal circumstances.
The first thing to look at is how much equity you have in your property. ie how much of it do you own outright? Every lender sets their own lending rules but there are a few that lend up to 90% LTV.
So the maximum would be 90% of the value of your home, less any current mortgages and secured loans.
While your available equity is important, before deciding how much to lend you, brokers and lenders will use affordability checks. These look at your income and outgoings to determine what size of loan might be affordable for you.
It’s highly possible that although you may have a significant amount of equity in your home, the lender offers a lower loan amount due to affordability concerns.
As homeowner loans are now regulated by the FCA, these checks are carried out on each application.
What can you borrow money for?
The lenders are pretty flexible and you can spend your loan how you wish.
Some popular uses would be:
- Home improvements
- Debt consolidation
- School/University fees
- New car
- Wedding
- Family holiday
Can I get a homeowner loan with bad credit?
Finding a sympathetic lender if you have bad credit can be challenging. But a history of bad credit doesn’t necessarily mean that you can’t get a loan.
It can be easier to get homeowner loans with poor credit as the lender always has your property to fall back on if the worst happens. This will not be the case with an unsecured personal loan.
There are many lenders that offer bad credit loans but ultimately the amount you could be offered must still fall within the lenders affordability and LTV criteria.
And of course as these loans are secured, your home could be at risk.
- Low credit score
- Mortgage arrears
- Defaults
- Late payments
- CCJs
- IVA
- Bankruptcy
- Debt management plans
- Repossession
Second Charge Mortgages
Specialist secured lending
Alternatives
A homeowner loan, or secured loan, should probably not be your first choice of borrowing option as there could be cheaper or more affordable options available. It’s best to discuss your choices with an independent mortgage broker who will be able to evaluate the costs and consequences of different types of borrowing.
These options might include:
Personal loan
A personal loan allows you to borrow an unsecured amount of up to £25000 over a fixed term.
It’s unsecured as you don’t need to provide any security to the lender.
Remortgage
By moving your whole mortgage over to a new lender you get the opportunity to choose a new interest rate deal and borrow more money at the same time.
Available up to 90% LTV.
Further advance
A further advance is secondary borrowing from your existing mortgage lender.
A good option if your main mortgage has ERCs or a low interest rate deal. Read Second charge vs further advance for more details.
For one reason or another you may find that some or all of these options are not suitable for you.
Remortgaging is probably the most popular option but if you have large exit fees to pay then its unlikely to be cost effective. Whatever type of finance you decide on it’s important to take advice and be aware of the potential consequences.
How to apply
Homeowner loans are not the type of thing you find in your local high street so it can be difficult knowing where to get one or if you have a good deal.
A lot of the lenders are specialists who only work with brokers and intermediaries. To get the best choice of loans we would recommend approaching a secured loan broker. They will not only be very experienced in helping people in similar circumstances, they will have the contacts and knowledge to search for a low interest deal for you.
It’s hard to be sure if you have the best homeowner loan unless this has been selected by an independent broker from those available. Respect Mortgages works with an award winning broker who are able to help people wherever they are in the UK.
FREQUENTLY ASKED QUESTIONS
Is a homeowner loan the same as a mortgage?
It is similar but mortgages are usually used to purchase or refinance a property using a first charge. A homeowner loan is a form of second charge or secured loan.
What documents will I need?
The documents you need will be the same as for a normal mortgage. ID and proof of address, bank statements and proof of income.
Do I have to use a broker?
No, you are free to find a deal on your own but many lenders do prefer working with brokers.
Who offers the best homeowner loans?
Typically these are from niche lenders who specialise in second charge mortgages. To get the best choice of rates we would suggest contacting a broker.
Are low interest homeowner loans available?
There are quite a few lenders competing for business so this does help to keep the interest rates low. That said you will find that the cost is higher than for a main mortgage.
Does a homeowner loan affect your mortgage?
It should not affect your mortgage in a way that disadvantages you or costs you more money. However, your main mortgage company needs to approve the homeowner loan second charge before it can be completed.
