Are you planning to re-do your garage before Christmas? Or perhaps you’re thinking about refurbishing your kitchen and dining area before Christmas. Such expenses can eat up a lot of money. While a typical loan can help you get through a basic cash crunch, they are not the best option when you require a larger amount of money.
Would you tap into a lifetime’s worth of savings to finance your project? Most of us wouldn’t. In such cases, your property could help you leverage the situation. You could opt for a homeowner loan against your property to secure some financial aid.
In this article, we’ll learn about homeowner loans and how you can capitalize on your share in your property.
What is a homeowner loan?
Homeowner loans let you borrow money against the share you own in your property. It is a form of secured credit – meaning you can borrow money by securing an asset as collateral. The only distinguishing factor is that you use your share in your property as collateral, rather than using an asset such as a car.
Homeowner loans allow you to borrow larger amounts of money at relatively lower interest rates. There are, however, some risks associated with this form of credit. You put your property at potential risk by declaring it as collateral. So in the event of a default, the lender could seize and repossess your home.
To apply for an unsecured homeowner loan, you need not be a homeowner. However, for secured homeowner loans, you need to have some equity in your property. Home equity is the value of your share in the mortgaged property. Put simply, home equity is the difference between the market value of your property and the amount you owe in the mortgage. Take a look at the example below:
Let’s say you’ve recently invested in a property worth £200,000, wherein you’ve paid 30% (£60000) as a down payment. Now, you take out a loan to pay the remaining £140,000. Hence, your equity in the property is £60,000.
What purpose will a homeowner loan solve?
Homeowner loans can be used for a plethora of reasons. Say you’re planning to refurbish your home or perhaps, planning to invest in a new property, the list can go on. If you, for instance, spot a highly sought-after property in a lush neighborhood, you wouldn’t want to wait too long. Instead of waiting for the sale of your old house to go through, you could simply use a homeowner loan to finance the new purchase.
Homeowner loans can also help in pulling you out of debt. If you’ve been piling on multiple debts, and now owe a huge amount of money, a homeowner loan could be useful. Since homeowner loans come at lower interest rates, people often use them to consolidate their debts. However, it is important to consider the risks involved in this type of finance, especially when you own a single property.
How much can I borrow through a homeowner loan?
The amount of money that you can borrow through a homeowner loan is determined by:
- Your credit history
- Monthly income
- The length of the loan term
- Your age
Most lenders have a standard criterion for the maximum loan to value ratio. Lenders decide how much they want to lend based on the value of your property. Consider the following example:
If you own a property worth £200,000 and want to borrow £90,000, the LTV is 45%.
Now, if you have an existing mortgage, subtract the outstanding balance from this mortgage to obtain the LTV.
Continuing the previous example, your property is worth £200,000 and your mortgage balance is £30,000. This will leave you with £170,000. Now, if you wish to borrow £90,000, your LTV will roughly be 53%.
How much will a homeowner loan cost me?
You can calculate the holistic cost of a homeowner loan by adding the interest rate and any additional fee to the principal.
Interest: Interest charged is payable throughout the loan term. It implies that you’ll end up paying a greater overall interest if the loan’s tenure is too long. A cheap loan will have a relatively lower interest rate. There are two types of interest rates that lenders charge:
- Variable: Variable interest rates are subject to change throughout the loan. Although, they are, initially, cheaper than fixed interest rates.
- Fixed: Fixed rates stay constant throughout the term of your loan.
Fee: Most lenders who offer secured credit don’t impose any additional charges. However, it is wise to check what your lender is charging before signing the agreement. Here are some additional costs that you may incur:
- Brokerage fee
- Legal fee
- Disbursement charges
- Valuation charge
What if I want to switch houses during the term of my loan?
Circumstances can change. You may want to move to a new place within the term of your loan. In such a case, you can consider the following options:
- Shift the loan to your new property: Lenders usually let people move their homeowner loan to the new property. But they may levy an additional charge.
- Use the sale money to repay the loan: You can use the proceeds from the sale of your old property to repay your loan.
- Apply for a new loan to pay off the original one: Sometimes, the funds released from the sale of your old property may not suffice? You could consider taking a new loan to repay your homeowner loan. However, tread cautiously as this move may impact your future mortgage affordability.
Tips to successfully apply for a homeowner loan
Here are some tips to help you apply for a homeowner loan:
- Identify your need. Assess how a homeowner loan will help solve the problem.
- Decide how much money you need and can afford. It helps you understand how much money you need to borrow.
- Calculate your Loan to Value based on your current property.
- Choose a reasonable loan term, keeping your affordability in mind.
- Plan your monthly repayments well in advance.
- Carefully check your credit score to rectify any discrepancies.