A homeowner loan is a loan that is secured against your property as a form of collateral. This means that your home may be at risk should you fail to make the debt’s repayments. These loans are also known as a ‘secured loan’ or ‘second mortgage’ and are only available to homeowners.
How Do They Work?
The main uses for homeowner loans include larger purchases, home improvements and debt consolidation. Generally the amounts available with these loan types can be anything from £3000 up to £100,000. These loans are usually based over a term of between 3 and 25 years, but most people often repay the loan much quicker by remortgaging or moving homes.
When you take out a homeowner loan you will sign a credit agreement which outlines the following:
- The amount borrowed
- The rate of interest
- The amount of interest charged
- The total amount repayable
- Your repayment terms
Types Of Homeowner Loans
Generally speaking, there are only three main types of homeowner loans available:
Short-term fixed rate
You pay a fixed amount every month throughout the short term of the fixed rate (between 1-5 years), your repayments will then go back to the lenders’ standard variable rate meaning that your payments will fluctuate.
Fixed for terms
You pay the same fixed amount every month throughout the entirety of your loan, your repayment amounts will not change. This type is particularly beneficial if you like budgeting and want piece of mind for your finances.
This type of secured loan is controlled by the Bank of England’s base rate and the interest you will pay is influenced by that fluctuating base rate. This means that your repayments and therefore the total amount you repay over the term could increase or decrease.
Important Points To Consider
As a homeowner loan is secured against your property as collateral, missing your repayments could not only damage your credit rating and history, but it could result in your home being repossessed by the lender.
Should you take out a variable rate loan type, increasing interest rates could mean that you pay a lot more than you originally though which could lead to situation where you are unable to make your repayments.
The repayment term directly impacts on the total amount repayable and the amount of interest charged on your loan. The longer you take to pay the loan off, the higher the total amount repayable will be.
Secured loans may include charges; arrangement fees and early repayment fees (a penalty for repaying the loan back early).
Some lenders may offer ‘payment holidays’ by where your payment is temporarily suspended. This may be a great benefit when finances are tight but it will mean that more interest will be charged in the long run and your total amount repayable will be increased.
Remember to do plenty of research and shop around to make sure you get not only the best deal, but the right deal available to you.