What is a homeowner loan?

A homeowner loan – which is a form of secured loan – lets you borrow money against the value of a house or flat you own. You can often borrow more than you could with a personal loan, sometimes at a lower interest rate. But beware: you could lose your home if you can’t meet the repayments. Here’s everything you need to know about homeowner loans.

What is a homeowner loan?

A homeowner loan is a type of secured borrowing, sometimes known as a second-charge mortgage. It uses a property you own, such as a house, flat or bungalow, as security. This means if you fall behind on your repayments, the loan provider has the right to repossess the property and sell it to recoup their losses.

Individuals often use homeowner loans to borrow larger amounts than is possible with an unsecured loan, in some cases up to £500,000 or more.

Homeowner loans can have lower interest rates than standard loans and may offer a way for people with an imperfect credit record to borrow money. 

However, as individuals generally take out homeowner loans over a longer term, the total cost can still be higher than a shorter-term personal loan with a higher interest rate. 

How do homeowner loans work? 

To apply for a homeowner loan, you must either be a homeowner or hold some equity in another type of property, such as a buy-to-let flat. This is because homeowner loans are secured loans that use property as collateral. 

You don’t have to own your home outright to get a homeowner loan, but the amount of equity you have in your property will be a factor in deciding how much you can borrow. This is because all homeowner loan providers set a maximum loan to value (LTV), which is a percentage of the equity you own.

For example, if your home is worth £300,000 but you have £150,000 outstanding on your mortgage, the value of your equity is £150,000. Therefore, to borrow £100,000, you would need to find a lender willing to lend up to 67% LTV. 

The amount you can borrow will also depend on:

• Your income

• Your credit record

• Your age

• Your desired loan term

However much you borrow, you will receive the agreed amount as a lump sum, and you will have to repay this amount, plus interest, in monthly instalments over the loan term, which could be up to 35 years.

Is it a good idea to get a loan against your house?

Homeowner loans offer lenders greater security than unsecured loans because they can sell your property and recover their losses from the proceeds should you default on the loan. 

As a result, the interest rates charged on these loans are often lower than those on personal loans, making them a cost-effective way to borrow money, particularly if you want to borrow a larger amount – say more than £25,000 – over a longer timeframe. 

They are also one of the easiest ways to borrow money if you have a low credit score. However, the risks to you as the borrower are greater than with an unsecured loan. 

For example, if you fall ill or lose your job and can’t meet the loan repayments, you might have to sell your home to avoid defaulting. 

And if you can’t sell your home for whatever reason, the lender could end up repossessing it, potentially leaving you without a roof over your head.

As the interest rates charged on homeowner loans are usually variable, your repayments may also rise over the course of the loan term if the Bank of England increases base rates during that time.

How much do homeowner loans cost?

Like all loans, the cost of a homeowner loan is largely determined by the interest rate, which is charged as part of your repayments for the duration of the arrangement. The interest rate can be: 

• Variable – meaning it could change over time but is normally a little cheaper at the beginning

• Fixed – meaning it stays the same for the duration of your loan, but the initial rate may be slightly higher

However, most homeowner loans come with variable rather than fixed interest rates. 

When comparing homeowner loans, it’s also important to watch out for charges such as: 

• Valuation fees

• Early repayment charges

• Arrangement fees

You should also bear in mind that the longer the loan term, the more interest you will pay overall. The annual percentage rate of charge (APRC) will tell you the total cost of borrowing, including interest and other charges.

Is a homeowner loan right for you?

Homeowner loans are a relatively high-risk way to borrow money, mainly because they could result in you losing your home if things go badly wrong. So, you need to be sure you can meet the repayments – even if your financial circumstances change. And while they can offer a way for people with less-than-perfect credit ratings to borrow money, they will still involve passing a credit and affordability check.

This makes them generally unsuitable for unnecessary luxury purchases, such as an expensive holiday or a flashy new car. The most common reasons for taking out a homeowner loan are:

• Home improvements, such as putting in a new kitchen, which should have the advantage of adding value to the property you are using as security

• Debt consolidation, which can simplify your affairs and could save you money, although only by putting your home at risk

Does a homeowner loan affect your mortgage?

Taking out a homeowner loan may affect your ability to remortgage your existing property to a new deal or secure a mortgage on a new property. This is because the repayments will increase your outgoings and reduce the amount of equity you own outright. However, once you have finished paying it off, you should find that you are still an attractive prospect to mortgage lenders. Indeed, maintaining a clean homeowner loan repayment record could even improve your credit score over time. 

It’s also worth knowing that should you fall behind with your homeowner loan repayments to the point that the lender forces the sale of your home, the proceeds of the sale will go towards clearing your main mortgage before the homeowner loan provider can claim its slice. 

This is because your main mortgage lender retains the right to first dibs should something go wrong.

What happens if you want to move house?

If you want to move home with a homeowner loan you can either:

• Transfer the loan to your new property – some lenders will let you move your loan to your new property in return for a fee  

• Use money from the sale to pay off the loan – although you may face early repayment charges for doing this 

If you’re stuck because selling your home won’t raise enough money to clear a homeowner loan in full, you could also borrow money via an unsecured loan, for example, to pay off the remaining amount. 

Are there any alternatives to a homeowner loan?

Yes, there are. If you have a good credit score and are borrowing less than £25,000, it’s worth considering an unsecured personal loan, which could save you money overall and does not involve putting your home at risk. 

For smaller amounts - for instance, if you want to finance a new bathroom or consolidate some existing debts - a low-interest credit card may also be an option.

Meanwhile, for larger sums, you can consider remortgaging to raise money by taking out a bigger mortgage with either your existing mortgage provider or a rival lender.