Homeowner Loans Explained

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 30 November 2020

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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.

What are homeowner loans?

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.

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 may include in their lending criteria that borrowers need to own their home.

For the difference between secured and unsecured loans read our useful guide.

So, 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 £15,000 and the repayment terms can usually be up to 25 years or the term of the borrower’s mortgage. The amounts available will differ between lenders and will depend on your financial circumstances and the amount of equity you have in your home.

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

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.

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, while there are a number of other unsecured lending options if you only need a smaller sum.

If you are beginning your research into personal loans, our guide on how to choose a personal loan could be helpful.

Whatever you decide, it’s important to do your research and be aware of the potential consequences of taking out certain forms of credit.

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
  • Payments can be fixed and made on a monthly basis, so you can budget for them
  • Can help those with less than perfect credit ratings to take out a loan
  • As the loan is secured against your home, you risk losing your home if you cannot keep up with repayments
  • If you choose a variable rate loan your interest rates can fluctuate; this can mean you pay more when rates increase
  • 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

Homeowner loans – other factors to be aware of

Secured homeowner loans can also have arrangement fees and other associated charges that could end up being quite expensive. Ensure you factor these into the total costs you expect to pay when taking out a secured homeowner loan.

You may be charged a transfer fee if you require funds immediately; this can be avoided if you wait the typical two to three days for transfers to process.

All fees and charges for a loan should be factored into the Annual Percentage Rate of Charge (APRC), so comparing loans via APRC is a good method to compare the true cost of loans, without being lured in by hidden costs and introductory periods.

Don’t be fooled by headline rates. The rates advertised by lenders only need to be given to 51% of lenders by law, so you may have to pay a higher rate after a successful application.

Beware of early repayment fees which apply to most homeowner loans. Before paying back early, which can have some advantages, make sure you are comfortable with the fees and check that it is still cost-effective to repay your loan early.

Early repayment fees are in place to cover lenders from the lost interest the capital would be accruing if borrowers were to repay on schedule. Early repayment fees will vary between lenders and products.

Lenders and products will have certain eligibility terms, for instance age, where borrowers must be between 21-65 years old. Most lenders also require borrowers to be a UK resident for at least three years.

Find out if a secured loan is right for you.

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 as, if you cannot keep up with the repayments, the lender could repossess your home.

About the author:

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

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