Homeowner Loan

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Understanding homeowner loans: a guide

There may be many reasons to take out a loan – debt consolidation, a period of unemployment or illness, or even making home improvements. If the amount you need to borrow is large, or you have had credit problems in the past, homeowner loans give you access the most favourable rates on the market.

There are two types of loan: secured and unsecured. Unsecured debt is typically granted for smaller amounts of money and for borrowers with good credit scores. When you borrow from the bank (as in the case of an overdraft) or on a credit card, the bank’s only return is the money it makes from the interest rate applicable. This can be substantial – especially in the case of credit card debt – but the loan is otherwise free from obligation on your part. The same is true of a more formal unsecured loan from bank, which might run to thousands of pounds. In the event that you are unable to continue repayments, your credit score may suffer as a result but the money has not been secured against a physical asset that you will lose to make good the debt. Unsecured loans tend to be harder to acquire than secured loans, and because you are offering no collateral in the case of default, the rates tend to be higher to average out the risk to the lender.

Homeowner loans and secured debt

The alternative is a secured loan, in which the money you receive from the lender is effectively underwritten by an asset which can be sold to pay for the debt should you otherwise be unable to meet repayments. The asset could be a car, a business or, as with a homeowner loan, a property. Of course, you must be prepared for the eventuality that you may lose that collateral if you do not meet repayments, as would be the case with a mortgage.

These loans tend to be much more favourable than unsecured debt because the lender knows that the money is already there. There is very little risk because the loan is based on the equity already accumulated in your house. Obviously the size of the loan will depend on how much equity you have. If you own your home outright you are likely to be eligible for a larger sum than if you have a large mortgage. Your present income and previous debt record will also be taken into account in the decision.

Compared to an unsecured loan, what this means in practice is that you are able to borrow more money at a lower APR (annual percentage rate – the yearly rate of interest on the loan), and for a longer period and therefore at lower monthly repayments. It is worth shopping around as rates can vary, but the advantages of a homeowner loan mean that they can be a useful option for consolidation if you have large amounts of more expensive unsecured debt on credit cards.

The Mortgage Broker

0800 822 3355


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