How do homeowner loans work?

You can only apply for a homeowner loan if you own a property or hold equity in a house in the UK. This is because a homeowner loan is granted on the basis of being secured against your property.

What does home equity mean?

Home equity refers to the percentage of your home that you own outright if you have a mortgage.  The best way to calculate equity is to subtract the amount outstanding from the market value of your property.

For example, if you purchase a house for £400,000 and put a 20 percent down payment this equals £80,000 plus a mortgage, then your home equity will be £80,000 in total.

The home equity you have will be what you can put down as security for your loan.

Can I increase my home equity?

Yes, you can do so through the value of your property increasing, or through making additional mortgage repayments.

Main features of a homeowner loan

With a homeowner loan, you:

• Have flexibility with a payment plan: the duration of the loan can be anything from 3 to 30 years in total. The longer the loan, the more interest you pay over time.
• Will need to pay interest for the duration of the homeowner loan
• Are able to borrow a set percentage of your property’s value
• Will need to pass both affordability and credit checks
• Your partner may also need to pass affordability and credit checks if you are financially linked.

How much can I borrow with a homeowner loan?

The exact amount will depend on the lender as well as:

• The value of your property
• Your credit score
• Your income
• Your age
• The duration of the loan

Every homeowner loan will have a maximum loan to value. this refers to the amount of money the lender will provide, based on the property’s value.

For example: if you had a home worth £300,000 and wanted to borrow £60,000, this would be a loan to value of 20%.

 

What can you use a homeowner loan for?

• To consolidate existing debts
• For home improvements
• For an emergency

There are a variety of reasons why one may decide to borrow a large amount of money through a homeowner loan. Common uses include home improvements such as renovating the kitchen, adding an extension or paying off existing debts.

Getting the best homeowner loan

To find the best-secured loan available you need to:

• Calculate your loan to value: this means having an accurate valuation of your property. You will also need to know the outstanding balance of your mortgage if you have one.
• Consider the loan term: what can you afford to pay each month, and how long will it take to pay back?
• Check your credit file: to see what your credit rating is and if there are any inaccuracies on file that need to be corrected.
• Work out exactly what you need to borrow: if it is less than £25,000 an unsecured loan could be a better alternative.