Homeowner loans explained
Secured loans are available to homeowners only, and as such they are often referred to “homeowner
loans”. This type of loan requires you, the borrower, to provide the lender with some form of
security, and in the majority of cases this will be your home - meaning that your home may be at
risk if you miss repayments. As the lender has security for the loan, sometimes a secured loan may
be offered at a lower rate than an unsecured personal loan.
How secured loans work
As secured loans are usually available for larger amounts and over longer repayment periods, people often
find they are ideal for larger purchases, debt consolidation and significant home improvements.
Typically the amount available as a secured loan ranges from £3,000-£100,000 although
some lenders may offer loans of much larger amounts depending on the circumstances.
When you take out a secured loan you will sign a credit agreement that outlines the amount
borrowed, the interest rate, the amount of interest charged and the total amount repayable.
It will also state your repayment terms i.e. your monthly payment along with the term of
the loan, in years and months. Secured loans are usually based over a term of between 3
and 25 years, but remember that the repayment term will have a direct impact on the total
amount repayable and the amount of interest charged i.e. the longer the repayment term,
the higher the total amount repayable will be. In practice, although most secured loans
are taken over a long period, most people often repay the loan much quicker, either by
remortgaging, moving house or obtaining funds from elsewhere. Recent changes to the
Consumer Credit Act (CCA) has seen the maximum early repayment charge for secured loans
being capped at 1 months' interest as long as 1 months’ written notice is provided, or
2 months' interest if no notice is given.
Because a homeowner loan is secured against your property, in a similar way to your mortgage,
missing repayments could not only have a negative effect on your credit rating but could,
as a last resort, potentially result in your home being repossessed by the lender.
To find a competitive secured loan deal it's best to compare rates - the interest
charged is the key thing to look for. All loans and credit cards must be expressed as an
annual percentage rate (APR) to enable you to compare like with like - the higher
the APR the more you may pay in interest. The majority of APRs advertised will show
“typical rates” - this means that at least 66 percent of successful applicants
must receive the typical rate or below. The remainder could be offered a different interest
rate, depending on their individual circumstances and the plans on offer from the lender.
The APR you are offered, along with the amount you are allowed to borrow, will be determined
by a number of factors. Firstly lenders will take into account the equity in your home,
most lenders will only work to certain Loan To Value (LTV) levels, in other words they
will only allow you to borrow up to a certain percentage of your property's value including
your current mortgage balance. Then they may look at the risk of you defaulting on any
repayments - known as “risk based pricing”. A lender may make a judgment on
your likelihood to default based on your credit profile, payment history and employment
status - the better your circumstances the lower your interest rate is likely to be.
Broadly, there are three types of secured loans to choose from:
- Short term fixed rate loans
You pay a fixed amount every month throughout the short term of the fixed rate
(usually between 1 to 5 years), your repayments will then revert to the lenders
standard variable rate, meaning your payments may then go up or down.
You pay a fixed amount every month throughout the term of the loan, giving you
peace of mind that your repayments will not fluctuate, and the ability to budget
your outgoings.
The interest rate you pay may fluctuate dependent on the Bank of England base
rate or market forces. This means that your monthly repayments and the total amount
you repay over the term could increase or decrease. If interest rates go up, you
could repay a lot more than you originally budgeted for or, worse case scenario,
be unable to meet your repayments.
What should you look for when taking out a secured loan?
When shopping around for a secured loan you should compare the APR of each product to find
out how competitive each deal is. However, there may be additional considerations:
Some lenders may charge a penalty if you repay the loan early (because they will not be
earning the interest they expected). The fee will vary between lenders and products.
Check the terms and conditions thoroughly for other fees, such as arrangement fees.
- Payment protection insurance (PPI)
This is an insurance product that could help cover your repayments if you can't
work due to an accident, illness or involuntary unemployment. It can be beneficial but
it can be expensive when sold alongside a loan. It is not compulsory and you may prefer
to shop around for a stand-alone deal. Always check that you are eligible for any cover
offered before you accept it.
- Payment breaks/deferment periods
Some lenders may offer “payment holidays”. While these can be beneficial if
finances are tight, bear in mind that interest will continue to be charged meaning that
the total amount repayable may increase.
Who are secured loans right for?
Usually, when people require a loan of more than £15,000 they opt to down this route.
Lenders tend to be reluctant to provide more than this amount without some form of security.
Generally, secured loans may be easier to obtain than personal loans due to the security
required by the lender. This could make them better suited to people with less than excellent
credit profiles, the self-employed and those who may have been turned down elsewhere.
Some people choose secured loans for the purposes of debt consolidation i.e. to pay
off all their outstanding debts, such as credit cards, store cards and hire purchase
agreements. This can help them to ease their cashflow by rearranging their outgoings
into one easier to manage, often lower, monthly repayment. By consolidating your debts
into a secured loan, you could reduce the amount you repay each month, or you could
control the length of time over which you will clear your debts. Reducing the amount
you spend repaying your debts each month may mean that you repay the total debt over
a longer period - so always remember that this option could cost you more in the
long run.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY
BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER LOAN
SECURED ON IT.
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