Homeowner loans

Most people nowadays take out some form of borrowing or credit to help manage their finances. Personal loans are particularly popular because they are easy to come by and quick to set up. Personal loans come in the form of either secured or unsecured borrowing. Unsecured means that no guarantee is used as protection of payment for the lender, whereas secured loans require the borrower to put up a guarantee, usually an asset such as their home, to safeguard the lender’s interests. It’s possible to obtain a loan secured on a home whether it is fully owned by the occupant or is still mortgaged. Secured loans using a property that is still mortgaged are referred to as second charges, whereas secured loans using a house that is owned outright are called first charges.

Owning your own home gives you a great head start in terms of access to borrowing, because property is valuable and can be a great source of capital. There’s a type of secured loan for homeowners known as a homeowner loan, which gives the homeowner access to the equity that has accumulated in their house by means of a cash loan that can be used for any personal purpose. (Equity is a property term meaning the value of a property after the total amount of any loans and debts associated with it have been deducted.) 

Here are just some of the advantages of homeowner loans:

• As the lender is safeguarded by the guarantee of your house in case of defaulting on repayments, the sums that can be borrowed tend to be a great deal higher than unsecured personal loans, and the lending period can also be a lot longer, just like a mortgage. It’s all about the degree of risk – the lender considers homeowner loans less risky because of the guarantee provided by the property.

• Being in negative equity isn’t necessarily an obstacle to getting a homeowner loan. (Negative equity means that the total amount of borrowing against a property is larger than the value of the property.) There are loan providers who will arrange homeowner loans over and above the current property value, sometimes up to 115%.

• As a result of the reduced risk to the lender and the longer repayment term, interest repayment rates can be lower than they would with an unsecured loan.

• Homeowner loans aren’t just for spending on your property. They give access to cash that you can use in any way, whether you want to extend or improve your home or instead buy a new vehicle, jet off on a luxury break, consolidate other debts or raise some capital to set up a company. The choice is entirely yours.

• Unsecured personal loans can be difficult to come by for people who have had financial or credit problems in the past. For people in these circumstances, homeowner loans can be easier to obtain because there is a guarantee of repayment to the lender.
Furthermore, homeowner loans can offer great flexibility, as there is the scope to unlock capital up to a very high sum and to arrange repayment terms of anything up to 25 years – and therefore also a wide range of interest rates available. The terms and conditions of the loan that you obtain (sum borrowed, rate of interest and period of repayment) will be determined on the basis of various factors including your property’s current equity and your financial circumstances, both past and present.

Do your homework before you commit to any deal. Look around to see what various providers are offering – terms can fluctuate a great deal. One thing to be wary of is the way in which the Annual Percentage Rate (APR) is marketed. Some lenders may focus more on the monthly interest rate than the APR (as it may be lower), making comparison difficult. To compare one deal with another, you need to know the APR of both. Ask each lender what the APR is and how it is worked out. In this way you can calculate for yourself what amount you will repay in total over the term of the loan and also what your monthly instalments will be.

Also beware of hidden costs such as administration charges and cancellation or early repayment penalties. Any such fees must be stated in the terms and conditions, so scrutinise the small print to see exactly what the situation is. Don’t be afraid to ask the lender questions for clarification.

Also think about the implications of the length of repayment term you take out. The longer you take to repay the loan, the more you’ll be repaying in interest, so it makes more financial sense to arrange the shortest repayment period affordable to you.

Nowadays you can buy financial products through various channels. You may want to check out your high street bank or building society to see what they are offering, but bear in mind that there are various other lenders now who can offer excellent deals, particularly large retail chains and Internet providers. It’s so easy to go online and search around and you may find you get a much more competitive price through a web-based lender.

A word of warning before you commit to a homeowner loan: think carefully about the advantages and disadvantages before you proceed, as you will be providing your home as security and you risk losing it if you default on your repayments. Ensure you understand your personal financial situation fully and calculate whether you can afford the regular repayments. If, after careful analysis, you’re sure it’s the right decision for you, a homeowner loan can be a convenient way to borrow money.

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