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A Guide to Secured Homeowner Loans

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Feb 8, 2023

What are secured homeowner loans, and how do they work? This guide explores everything you need to know

Maybe you’re tired of all the credit card bills, personal loans, car loan payments, and student loan instalments you have to make every month, and a debt consolidation loan is just the thing you need to get a handle on your finances.

As great as it may all sound, unless you’re swimming in money, you’ll need to take out a loan to finance your projects.

Secured homeowner loans are a simple, convenient source of cash when you can borrow vast sums of money at a lower interest rate.

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What are secured homeowner loans?

A secured loan is a form of lending in which the borrower puts up an asset as collateral to guarantee the loan.

The asset can be anything from a residential property to a motor vehicle. In the case of secured business loans, some common assets used to secure the debt include commercial property, plant machinery, equipment, warehouse stock, and even accounts receivable.

A secured homeowner loan is a secured loan where the borrower uses their property or the equity they hold to secure the debt. Home equity refers to the portion of your property’s value that you own outright if you have a mortgage.

You calculate it by deducting the remaining unpaid balance on your mortgage from the total market value of your property.

For instance, if your home’s current market value is £300,000 and the balance on your mortgage is £100,000, you hold £200,000 worth of home equity. You can use this portion as security when taking out a loan.

Secured homeowner loans may also be referred to as second-charge mortgage loans or home equity loans.

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How do secured homeowner loans work?

A secured homeowner loan works like any conventional secured loan.

Once you apply for a second-charge loan and provide the required documentation, the lender will assess your application based on various criteria.

For instance, they will be interested in whether you have a regular source of business or employment income, what your month-to-month income and outgoings are, and whether you have any other existing debt. The value of the asset you intend to use as collateral.

Based on this information and your existing borrowing, they will do an affordability assessment of your finances.

This will help them determine whether or not you will comfortably afford the monthly repayment instalments from your leftover disposable income.

If they approve you for a secured home equity loan, you must sign a loan agreement before the funds can be disbursed to your bank account. You will then be required to repay the loan with interest by making monthly repayment instalments for the entire loan term until it is fully settled.

If you fail to keep up with the monthly payment, the lender can dispose of your asset and use the sale proceeds to offset the unpaid loan balance.

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What is the maximum loan amount you can borrow with a secured homeowner loan?

The maximum loan amount you qualify for will depend on several factors, key among which are:

  • The value of home equity you hold in your property
  • The maximum loan-to-value ratio (LTV) available to the lender
  • Your present financial situation

That said, even if you meet all of a lender’s criteria, most UK loan companies will not give you the full value of your home equity. The majority offer 50-80% of it.

For instance, if you hold £200,000 worth of home equity in your property, most lenders will approve you for a second charge mortgage worth £100,000- £160,000.

The reason for this is that, from a lender’s point of view, the value of your property could decrease, effectively putting you in negative equity. The maximum amount you can borrow all boils down to the lender’s LTV.

While credit history doesn’t play a major role in a lender’s decision on whether or not to approve your secured homeowner loan, it will affect the loan amount you’re approved for. If your credit score is too low, the LTV available to you might be lower than for someone with good credit.

Ensure that the mortgage lender you’re borrowing from is licensed and regulated by the Financial Conduct Authority. The lender should also appear in the Financial Services Register, which is maintained and updated by the Financial Conduct Authority.

As part of your due diligence process, check to ensure that the address and contact details listed on the lender’s official website match those listed on the Financial Conduct Authority register.

Do I qualify for a secured homeowner loan with poor credit?

Your credit score matters to lenders when assessing whether or not to approve you for a loan, but not to the extent you might think.

While it is harder for prospective borrowers with a poor credit history to qualify for various credit products, it is not impossible.

A lender will do a credit check to see what credit issues you have in your file. Depending on the severity, they may or may not approve your loan application.

That said, if your low credit rating is the result of minor credit issues such as late or missed payments or minor defaults, a specialist bad credit lender won’t have a problem approving you for a secured homeowner loan.

However, it might be harder to qualify with major credit issues such as a bankruptcy filing in the last year or if your credit report reveals that you have a county court judgement (CCJ) against you.

Other than that, provided you have a property or home equity you can use as collateral and a regular source of business or employment income, you should have no problem securing a homeowner loan, even with bad credit.

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Is there an alternative to secured loans?

If the idea of securing debt against your home isn’t the least bit appealing, here are some alternatives to homeowner loans worth looking into:

  • Unsecured personal loan: A lender grants this type of loan solely based on the borrower’s credit rating.
  • Credit card: This provides a risk-free way of short-term borrowing.
  • Guarantor loan: Instead of using your home as collateral for the debt, you can get a friend or family member to guarantee the loan on your behalf. They would be liable for the debt if you default on your debt obligation to the lender.
  • Remortgaging: This involves restructuring your current bad credit mortgage with your lender by borrowing additional cash. Alternatively, you could remortgage with an entirely different lender offering cheaper terms. This will allow for equity release and free up cash each month. You can use bridging finance to facilitate the transition.

Get lending expert help from a homeowner loan broker

Your house should be more than just a roof over your head. It should be an asset you can leverage whenever you need access to large sums of money. Secured loans exist for just this purpose.

With so many lenders in the market, choosing the right loan can be an uphill task. An experienced loan broker understands the nuances of the UK lending market. If you’re looking to get the best annual interest rate and repayment terms on your secured loan, it would be in your best interest to go through a loan broker.

FAQS

How hard is it to get a secured loan?

A secured loan is generally easier to qualify for than an unsecured loan. In the latter, your credit rating will determine whether or not your application is approved, which can prove problematic if you have bad credit.

When can I get a secured loan with bad credit?

Yes, you can. Most specialist bad credit lenders are more interested in your ability to repay the loan and the value of the asset you’re putting up as collateral than they are in your actual credit score.

What is the difference between a secured homeowner loan and a second charge mortgage?

Secured homeowner loans and second-charge mortgages both mean using your home equity as collateral to secure a loan.

A bridging loan is a type of secured financing taken out when buying a new property before disposing of your old one.

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