What is a Homeowner Loan?

Homeowner loans are a form of secured loan. Available only to homeowners with equity in their property, these loans are secured against the value of the borrower’s home.

John Ellmore, Rhiannon Philps Published on 30 October 2020. Last updated on 07 September 2021.
What is a Homeowner Loan?

Many borrowers are unclear exactly what the term homeowner loan means. In this guide we aim to clear up any confusion, so you can decide whether a homeowner loan is a good fit for you or not.

Homeowner loans explained

A homeowner loan refers to a secured loan where the sum borrowed is secured against the borrower’s home. Their home acts as security, which minimises the risk for the lender but increases the risk for you, the borrower, as you could lose your home if you don’t repay the loan.

You may find that homeowner loans are sometimes called second charge mortgages. Even though they have different names, they are both loans that are secured on the equity you hold in your property and the lender could repossess your home if you don’t repay them.

To be eligible for a homeowner loan, you will need to either own your property outright or hold some equity in a property and be paying a mortgage on the remaining value. The total value of the property and the amount of equity you own will determine the size of the homeowner loan you can receive.

As with other loans, factors, such as your credit score, income, and your age, will also affect your eligibility for a secured homeowner loan.

Homeowner loans are not to be confused with certain types of unsecured loans, which stipulate that borrowers need to own their home.

» MORE: What are secured loans?

How do homeowner loans work?

Borrowers often turn to homeowner loans to obtain a sizeable sum of money, which may be used to fund home improvements, major purchases, or to consolidate debt for example.

These loans tend to be available for sums over £10,000 and the repayment terms can be up to 25 years. The amounts available will differ between lenders and will depend on your financial circumstances and the amount of equity you have in your home.

You will only be able to borrow up to a certain percentage of the amount of equity you own. For example, if your property is worth £200,000 with £80,000 left to pay on your mortgage, lenders will only offer loans worth up to a certain percentage of the £120,000 you own.

Because the loan is secured against your home, borrowers can often obtain larger sums and get lower interest rates than they could through an unsecured loan.

If your application is approved, you will repay the loan in monthly instalments. Bear in mind that homeowner loans may have variable interest rates, which means your monthly payments could change.

When you apply for a homeowner loan, more in-depth checks will need to be made to determine the value of your property and your ownership of it – something that won’t happen when you apply for an unsecured loan.

» MORE: The differences between secured and unsecured loans explained

Pros and cons of secured homeowner loans

Pros Cons
Typically, interest rates are lower than unsecured loans because the loan is secured against your property. As the loan is secured against your home, you risk losing your home if you cannot keep up with repayments.
It allows you to borrow more money than with an unsecured loan. If you choose a variable rate loan, your interest rates can fluctuate. This can mean you pay more when rates increase.
It can help those with less than perfect credit ratings to take out a loan. If you use a secured homeowner loan to consolidate your existing debt into one larger debt, you may end up paying more in interest over the loan term.
It may include expensive arrangement fees and other charges.

How to apply for a homeowner loan

Before applying for a homeowner loan, you will need to be clear on how much you want to borrow and over how long you want to repay it. Work out the value of your property, or the amount of equity you own, as this will affect how much you are eligible to borrow.

You will also need to understand that your property would be at risk if you don’t manage to keep up with your repayments, so you have to be confident that you will be able to repay the loan in full.

It is also worth checking your credit score, so you have time to improve it if necessary. Making sure your credit score is as good as it can be before applying for a loan could help you get accepted and receive more competitive rates.

If you are ready to proceed with your application, you can compare homeowner loans from a range of lenders. Make sure you don’t just look at the interest rate, but also consider the other charges you may need to pay such as arrangement fees. The annual percentage rate of charge (APRC) will tell you the total cost of borrowing, including interest and other charges.

» COMPARE: Secured homeowner loans

Can I get a homeowner loan with bad credit?

You may be able to find a homeowner loan even with a poorer credit rating. Those who don’t have as strong a credit history may be able to access a larger sum from a secured homeowner loan at a more affordable interest rate than they could get from an unsecured loan.

This is because, with a secured homeowner loan, your property is used as collateral for the loan which reduces the risk for the lender. If you cannot keep up with the repayments, the lender could repossess your home.

Alternatives to secured homeowner loans

There may be alternatives to secured homeowner loans. For example, if you need to borrow a larger sum of money, you could see whether remortgaging could work for you. You could remortgage and borrow more than what you currently owe from your existing lender, or find a new lender offering a better rate and borrow more on a new deal.

If you only need to borrow a smaller sum, an unsecured personal loan may be more suitable. These loans don’t require you to put forward any security, so your home won’t be at risk if you miss repayments.

However, you are likely to face higher rates of interest than if you choose a homeowner loan.

Whatever form of finance you decide on, it is important to do your research and be aware of the potential consequences of taking out certain forms of credit.

» COMPARE: Personal loan rates

WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it.

About the authors:

John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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