When it comes to borrowing money, there are two main types of loan available: unsecured or personal loans and secured or homeowner loans. While unsecured loans are not backed by any form of security, homeowner loans are secured against a borrower’s property.
Homeowner are also significantly different to personal loans in that they are available for much larger amounts and can be repaid over a longer period of time. People use homeowner loans to fund many different kinds of purchases including house renovations and improvements, financing for new vehicles, the once-in-a-lifetime holiday that we all deal with and for consolidating other debts by rolling them into a simple monthly repayment.
While the prospect of securing a loan against your home can be daunting, only a tiny minority of borrowers actually end up facing repossession. Homeowner loans are, in principle, no different to other forms of borrowing in that the applicant has nothing to fear so long as he or she is confident that the repayment schedule is affordable and there is little or no danger of falling into arrears. Hundreds of thousands of borrowers use homeowner loans responsibly,
How do these loans work?
Homeowner loans are only available to applicants who own their own properties either with a mortgage or outright. The loan is then secured against the house. When you take out a homeowner loan, you are signing a legal agreement where your house stands as security against both the loan amount and the interest chargeable. Should you fail to keep up with the repayments, the lender will be able to go to court to apply to take possession of your house and sell it to cover the loan and its costs.
But the days when unsecured loans were an easy option compared with homeowner loans, are fading fast. Financial organisations that offer unsecured forms of credit are now increasingly using charging orders to recover money when a unsecured borrower defaults on a loan’s terms and conditions. When granted such an order, a lender is able to take further action in court to repossess a house to repay a loan, which started off as unsecured.
Can I apply for a homeowner loan?
If you own your own house or flat then, yes, in principle you should qualify for a homeowner loans. But there are some people who cannot – if you live in a house with shared ownership or another form of social housing where your payments are part rental, part mortgage or if you already have a second charge (a secured loan other than your primary mortgage) against your property, you may not be able to apply.
Are they more difficult to get than unsecured loans?
In short, no. People with poor credit records may find it a struggle to get access to secured lending. This is because the banks and other lenders may view them as higher risk than people with perfect credit scores and, because there is no security involved, may reject an application because they judge that the borrower will be less likely to repay the capital sum plus interest.
Even those people suffering poor credit scores who do manage to get accepted for unsecured loans may find that they have to pay higher rates of interest than those with better records of financial management.
In contrast, secured loans are available to people with impaired or poor credit ratings because the lender has the ‘backstop’ of the property as security. If the worst comes to the worst, it can take possession of a borrower’s home and sell it to cover both the debt and any unpaid interest.
What sums are available?
Amounts from the relatively modest (around £5,000) up to £75,000 are typical among most lenders. However, others do offer much larger amounts with some offering up to £250,000 depending on how much your house is worth compared with your outstanding mortgage. That’s because the lender will want to be certain that there is enough equity in your home to cover both your existing mortgage and the new amount you are proposing to borrow.
What are the main options with homeowner loans?
Lenders in the UK offer three main types of homeowner loan:
• Fixed rate loans. These are generally shorter term loans where the the interest rate or APR is fixed over a certain timescale – usually between one and five years. Where the repayment schedule goes beyond the fixed rate period, then the interest rate will revert to the lender’s standard variable rate for the remaining payments. As with your mortgage, these variable rates can go up or down depending on the Bank of England rate and other factors.
• Homeowner loans with lifetime fixed rates offer the borrower the confidence of knowing exactly what he or she will have to repay every month until the loan is satisfied. This means that you will be able to budget throughout loan’s life because you will know that the repayments will not change.
• Variable Rate Homeowner Loans. With these, the interest rates will rise or fall depending on what is happening in the economy or the credit market in general. Your repayments will go up or down throughout the loan’s life and, in the most extreme circumstances, can rise dramatically when the bank rate is raised as an instrument of macro economic policy. When that happens, some people who are already struggling financially may find that they cannot cope with the repayments.
How much interest will a borrower pay?
These can vary according to where you borrow from and what your credit record is. There are plenty of lenders offering homeowner loans with APRs as low as 4.5 per cent to people with perfect credit scores and who are applying for the larger amounts. But if you’ve got a bad credit record and only want to borrow a smaller amount, you might find that you’ll be charged interest of up to 15 per cent annually.
What are the repayment schedules?
The more you want to borrow, the longer you’ll have to repay it. The smaller loans come with repayment schedules of up to 10 years while the larger ones can give you between 20 and 30 years to repay.
Article provided to The Happiest Homes by Mike James, an independent content writer working together with technology-led finance broker Solution Loans, who were consulted over the information in this post.