Compare Homeowner Loans

What is a homeowner loan?

A homeowner loan, also known as a second charge mortgage, is a type of borrowing that’s secured against your home. It works as a separate loan to your primary mortgage, but both mortgage loans are secured against one property.

Homeowner loans can be used for all sorts of purposes, including funding home improvements, consolidating debt, making major purchases or even as a deposit for a new property.

Using your home as security for the loan reduces the lender’s risk, but increases yours as the lender could sell the property to pay off the balance if you stop repaying the loan.

What is a secured loan?

A secured loan uses a high-value asset that you fully or partly own as security for the money you borrow. This is usually a property, but some loans might use a car or other asset as collateral.

Using your home as security reduces the lender's risk of lending to you, so you may find secured loans offer lower interest rates than loans that don’t use collateral. But the risk to you is that the lender could take steps to recover its costs through selling your home if you don’t pay it back.

» MORE: How secured loans work

How do homeowner loans work?

When you apply for a homeowner loan, the lender will carry out checks to confirm the value of your property. It will also run credit history and affordability checks. Along with how much of your home you own, these checks will affect its decision, the amount you could borrow and the terms it offers.

If you choose to take out the loan, you agree to pay back the amount you have borrowed plus interest in monthly instalments, plus any fees due, over a set period of time.

Some homeowner loans have variable rather than fixed interest rates, which means your monthly payments could change. The lender should make this clear in its loan information, but ask if you’re unsure.

Homeowner loans vs borrowing more on your existing mortgage

A homeowner loan is a second mortgage in addition to your first secured mortgage loan. So it means securing a second, separate loan against the same property, usually with a different lender and interest rate.

Further advance

A further advance is where you ask to borrow more money on your existing repayment mortgage from your current mortgage lender. This will be at a different, and possibly a higher rate to your current deal. You should be confident that you can afford the increased payments. The lender will check the affordability of the loan as part of the process. You may also consider switching to a new mortgage rate at the same time, called a product transfer, if the time is right.

Remortgage

It’s possible to borrow more by remortgaging to a new deal with a different lender or with your existing lender. This would mean moving your current mortgage to a new rate and increasing the loan. Which route you choose can depend on where you are in your current mortgage deal and also whether your finances are in good shape or have worsened.

A further advance may come with better terms and lower interest rates than a homeowner loan, but it makes sense to compare your options based on your circumstances ? and across lenders. For example, you may find that there is more flexibility with homeowner loans if you have bad credit than if you are looking to remortgage.

Don’t forget to factor in fees and charges for changing your mortgage.

» MORE: Compare remortgages

What is home equity?

Home equity is how much of your property that you own. You can work this out as the value of your home minus the loan amount still outstanding. This can increase over time as the value of a home increases and, for a repayment mortgage, as you pay off the capital off as well as the interest.

For example, if your property is worth £300,000 and you have an outstanding mortgage of £120,000. This would mean you have £180,000 worth of equity in your house.

Home equity is important for homeowner loans as it helps lenders decide how much you can borrow and at what rate. The loan itself is secured against the amount of the property you own.

» MORE: Why does house equity matter?

Interest rates for homeowner loans

Homeowner loans are available with two interest rates:

• Variable interest rates: This can change over the time you have the loan. So you would need to be comfortable with your payments going up as well as down, and be able to afford this. The initial rate offered might be lower than a fixed-rate loan.
• Fixed interest rates: This is the more predictable rate, as your monthly payments wouldn’t change over the lifetime of the loan. Once your fixed-rate deal ends, you may need to pay a higher monthly payment, depending on what deals are available.

Be clear about how you will be charged interest and what the interest rate the lender is offering will cost you overall. The amount you want to borrow may also affect the interest rate you are offered.

Costs and fees that come with homeowner loans

As well as the interest rate, also factor in any fees and charges when calculating the overall cost of a homeowner loan. Similar to a primary mortgage, this might include arrangement, valuation and legal fees, for example.

If you use a broker registered to find and arrange a homeowner loan, they may charge a fee for their advice and for setting up the loan. This might be a fixed sum or a percentage of the loan amount.

When you compare homeowner loans, look at the representative total cost, known as the annual percentage rate (APR), which includes interest and fees.

» COMPARE: Second charge mortgages

How do you pay off a homeowner loan?

You pay off a homeowner loan in monthly instalments. Your payments repay the amount you borrowed with the interest on top of that, for the agreed term, plus any fees and charges.

If you want to pay a loan off early to save money in interest over time, you can. But first check if there are early repayment charges and how much these would be before you go ahead.

Pros and cons of homeowner loans

It’s a big decision to secure a loan against your home, so it makes sense to give it careful thought before going ahead. Here are some of the potential pros and cons:

Pros

• There may be large sums of money available to borrow.
• You may be considered even if you have a poor credit rating.
• Interest rates may be lower than for unsecured loans.
• Longer loan terms may be available.
• You don’t have to exit your existing mortgage deal, as it’s a separate loan.
• It can offer a separate way to borrow if you have an interest-only mortgage and increasing your current mortgage loan isn’t an option.

Cons

• Your home may be repossessed if you don’t keep up repayments.
• You can usually only get this type of loan through a broker.
• There are fees and charges to consider.
• The second charge lender takes second priority behind the first mortgage lender, so it may charge a higher interest rate to reflect that risk.
• You will have two mortgage payments to consider.
• It might affect the terms lenders offer if you remortgage in the future.

» COMPARE: Does a secured loan affect remortgaging?

Is a homeowner loan right for me?

Like most personal finance decisions, whether a homeowner loan is right for you depends on your specific circumstances. Consider how much you want to borrow and for how long, and whether other potentially cheaper ways of borrowing are accessible to you.

You will need to meet the lender’s criteria, and your credit history and whether you can afford the loan will also play a part. How much of your home you own will also have an impact on the decision and the terms you are offered.

It’s key that you are confident that you can afford the repayments, as you risk losing your home if you can’t. If you’re not sure which option is right for you, speak to a financial adviser or broker, but ask about any fees they charge before going ahead.

Can I get a homeowner loan with a bad credit history?

It can be possible to get a homeowner loan if you have a limited or poor credit history, though it might limit your options and affect the terms you’re offered.

As lenders will have your home as collateral for the loan, it helps reduce the risk to them. So they may place less emphasis on your credit score than they might if you were applying for an unsecured loan. Factors such as other debts, your income and how much of your home you own will be considered too.

» MORE: Can I get a homeowner loan with bad credit?

How to find and compare homeowner loans

To compare homeowner loans, just go to the top if this page and fill in:

• the loan amount
• what you plan to use the money for
• how long you want to pay off

When you use our eligibility tool, our partner broker Norton Finance will work to match you with providers. From the results, you can compare features between loans, such as the representative APRC, loan amounts available and the term lengths on offer.

Using this search won’t affect your credit score.

Homeowner Loans FAQs

WARNING: Think carefully before securing other debts against your home. Your home may be repossessed if you don’t keep up repayments on a loan or any other debt secured on it.