Homeowner loans

If you own a home and need a substantial amount of money, a homeowner loan might be a good choice for you. Our guide explains how a homeowner loan works and what it means to use your property as collateral. We cover the benefits and risks, other options you can consider, and how to find the best homeowner loans.

What is a homeowner loan?

A homeowner loan lets you borrow money using your property as security. Whether you own a house, bungalow, or flat, you can use it as collateral for the loan.

Lenders might approve these loans even if your credit isn’t great. You can even borrow more significant amounts at lower interest rates than with personal loans. However, it’s absolutely critical to make your repayments on time. If you don’t, the lender will have the right to sell your property to recover the unpaid money, but this is typically a last resort.

How do homeowner loans work? When you get a homeowner loan, you’re borrowing a lump sum of money using your home as security. You then pay back this money, plus interest, in monthly instalments over a set number of years.

These payments are separate from your mortgage payments, but like a mortgage, the loan is connected to your home. This means the stakes are higher for you to make timely repayments and only borrow what you really need.

Who are homeowner loans suitable for?

This type of loan is designed for homeowners or those paying off a mortgage who need to borrow a more considerable amount than what’s typically offered with an unsecured personal loan.

A secured homeowner loan could be a good choice if you:

• Own all or part of your home
• Have difficulty getting approved for an unsecured loan
• Have a credit history that’s less than perfect
• Require a substantial sum for expenses like a wedding or home improvements
• Prefer to spread out repayments over a longer period
• Plan to use the money as a deposit for another property

Lenders tend to look for evidence of full home equity — meaning you’ve paid down your mortgage or your property has increased in value. If that’s the case, you will have assets to cover the loan and any remaining mortgage debt if you can’t make the repayments.

If you're thinking about tapping into your home's equity, you might want to explore the option of remortgage.

What can I use a homeowner loan for?

Here are some common and justifiable uses for a homeowner loan:

• Debt consolidation — Many people choose these loans to merge multiple debts into one manageable payment. This helps simplify finances and lower overall interest costs.
• Funding major expenses — Whether it’s covering wedding costs, financing a vacation, or making extensive home improvements, loans provide a lump sum for substantial costs.
• Home improvements — These loans are ideal for big projects like home extensions or kitchen upgrades. With more time to repay than with unsecured loans, they make monthly payments lower, and you can still use the funds to boost the value and comfort of your home.
• Second property deposit — This allows you to make property investments or expansions with the security of an existing property.
• Large necessary purchases — When essential expenses arise, like replacing a boiler or a major appliance, homeowner loans offer immediate funds to cover them without disrupting financial stability (at least, not by much).

Not all reasons are good enough to borrow with a homeowner loan, for example:

• Using the loan for luxury items or non-essential expenses that can be postponed or saved for;
• Risky investments or ventures where returns are uncertain or volatile;
• Using the loan to cover temporary financial gaps or ongoing living expenses without a clear repayment plan;
• Consolidating debts that could be managed effectively with existing repayment plans or financial counselling.

What should I look out for when taking out a secured homeowner loan?

Before taking out this secured loan, understand a few key points:

• Repossession risk — If you fall behind on payments, the lender may take legal action, which will potentially lead to the repossession and the sale of your home to cover the outstanding debt.
• Variable interest rates — Your loan could come with a variable interest rate that causes your repayments to change in response to market shifts. If you also hold a variable-rate mortgage, any rise in interest rates will amplify the impact on your finances.
• Limited repayment flexibility — Repayment holidays allow you to temporarily pause payments during financial difficulties; however, many lenders don’t offer them.

Only move forward with the loan if you’re okay with these risks and factors and you’re sure you can handle any challenges that might come up.

What types of interest rate can you get with a homeowner loan?

The type of homeowner loan rates you choose will impact your total loan cost. There are two types:

• Variable interest loans — Changes in market conditions or adjustments to the Bank of England base rate could cause your payments to go up as the interest rate fluctuates. If that happens, the loan will cost you more than expected.
• Fixed-rate interest loans — With this option, you pay a set interest rate throughout the loan term. This provides predictability as your payments remain constant, and it helps you budget better.

In addition to these two, there are short-term fixed-rate loans that provide a fixed rate for a specific period (one to five years, in most cases), after which you switch to the lender’s variable rate. However, with these, you need to be cautious because you may get a bad deal after the initial fixed period.

Types of homeowner loans

There are several types of homeowner-secured loans, including:

• Mortgages — A standard mortgage is secured against your home. This allows you to borrow up to 95% of your property’s value with a high loan-to-value ratio.
• Second mortgages or second-charge mortgages — This is what most companies mean by homeowner loans. These loans use the equity you have in your home as security. The amount you can borrow increases with the amount of equity you have.
• Bridging loans — This loan type helps you access funds to buy a new property while waiting for the sale of your current home. It’s secured against your home and is meant for short-term borrowing.
• Homeowner loan with bad credit — If you end up with a poor credit history, a secured bad credit loan allows you to reduce the risk from the lender’s perspective.
• Debt consolidation loans — These loans combine all your existing debts into one, usually with a lower interest rate.

Second mortgages, bad credit loans, and debt consolidation loans are quite similar. With all of them, you’re leveraging your home’s value for borrowing purposes. Feel confident exploring any of these options since their basics are largely alike.

How much does a homeowner loan cost?

The homeowner loans cost includes:

• Interest rate — The amount charged for borrowing the money.
• Loan fees — These can consist of arrangement fees, valuation charges, and legal costs associated with setting up the loan.
• Early repayment fee — If you pay off the homeowner loan early, you might face early repayment charges.

The interest rate you’ll pay depends on the loan size, duration, and the value of your property used as collateral. If you have poor credit, expect higher interest rates or possibly being declined for a homeowner loan altogether.

Selecting a longer loan term is a viable solution if you want to manage and reduce your interest expenses. Nevertheless, assessing the total cost impact is essential, as you'll opt for an extended repayment period.

What do I need to compare loans?

You only need the most basic information about the loan deal to use a comparison service. This process requires some preparation, such as reviewing your current finances and calculating your borrowing needs.

To compare loans effectively:

1. Decide how much you need to borrow.
2. Choose how long you want to take to repay the loan.
3. Determine how much you can afford to pay back each month.

These details help the homeowner loan calculator show you the loans that match your needs and make it simpler to find the best homeowner loan for you. The results should be sorted using the lowest annual percentage rate of interest shown first (representing the total cost of the loan, including interest and fees).

Is a homeowner loan right for you?

Let’s first consider the pros and cons because the answer isn’t that straightforward.

Overall, homeowner loans are risky because they use your home as security, and if you can’t manage the payments, you could lose your house. They’re not suitable for everyone, especially those with unstable financial circumstances. However, they're a viable option if you want to borrow a lump sum for something essential for you and your family, and you can arrange manageable monthly repayments.

Are there any alternatives to a homeowner loan?

Homeowner loans are popular, but they aren’t the only option available. While they’re suitable in certain circumstances, other options might also be worth considering.

• Remortgaging — If your existing mortgage deal is ending, switching to a new lender could allow you to borrow additional funds at a lower cost.
• Unsecured loans — These loans are well-suited if you have a good credit score and need to borrow smaller sums over a brief period. Unlike home loans, they don’t require you to put up collateral.
• P2P loans — These loans are not backed by collateral and feature lower interest rates than conventional bank loans. However, eligibility criteria apply, and missed payments result in quicker debt collection actions.
• Interest-free credit cards — For medium-sized purchases, using a credit card with a 0% interest period can be beneficial if you can repay the balance or transfer it to a new card before the introductory period ends.

These alternatives aren’t necessarily better, but they should still be considered alongside a typical loan. All of them have their own advantages and things to think about, even if you ultimately prefer to take a loan secured against your home.