Should You Borrow Against Your Home?

We discuss the benefits and pitfalls of homeowner credit lump sums…

Updated: May 21, 2024
Matt Crabtree

Written By

Matt Crabtree

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Homeowners who need a large quantity of money quickly may be able to do so by taking out a loan secured by their property.

Your house may be worth tens or hundreds of thousands of pounds, and you may be able to free up part of that money by taking out a loan against it. Although a secured loan could let you borrow a significant quantity of money, it also puts your property at risk in the event of non-payment.

Learn the scenarios in which a home equity loan could be the best choice.

Do I qualify for a homeowner loan?

Home equity loans are common. You can try to get one in primarily three ways:

  • A secured loan is one that is backed by equity in some other asset, most often real estate. Here you may examine the market rates for secured loans. A second charge mortgage is another name for secured homeowner loans.
  • A new sum of money may be borrowed from your existing mortgage lender. The interest rate may be different from your primary mortgage, but the supplemental funds are still backed by your home's equity.
  • If you are able to do so, you may remortgage your property to get a loan for an amount more than what you already owe on it. Consider all the costs to determine whether this method of borrowing is indeed more affordable than others.

In either case, you are using your house as collateral to ensure that you will pay back any loans that you take out via any of these methods. This implies that if you are unable to repay the loan, you risk losing your house. 

You won't be able to get a loan against your home as collateral right now if your equity is negative. In other words, if you have a mortgage debt that exceeds the value of your home, you do not have any equity to offer as collateral for a loan.

Do all homeowners get loans?

It is not a sure deal that having equity in your property means you will get a loan against it. You will need to be approved by the lender, just as with any other loan. Your ability to repay the loan will be evaluated based on factors such as your credit score, income, expenses, and job history, as well as the value of your property and other assets.

It is possible to get a secured loan even with a low credit score. Those with less-than-perfect credit records or business banking debts may have an easier time being approved for a secured loan than an unsecured one.

When to get a homeowner loan…

When is it a good idea to get a home equity loan?

Should you borrow against your home? This is very situational, so if you're unsure you should get some guidance. You could consider taking out a mortgage loan. You should only seek a home equity loan if you really have to have the money and have exhausted all other options:

  • You require a sizable loan, say, for home renovation costs; if you need a loan but would like a lengthy payback period.
  • You need to borrow money and pay it back slowly. Yet, the interest you pay increases with the length of your repayment term.
  • It's hard for you to get the lowest possible interest rates. As the lender has more to lose with a secured loan, the interest rate is often lower than with an unsecured loan.

It's important to carefully consider the consequences of taking out a mortgage loan. If you're not sure you can afford to make the monthly payments on a secured loan, don't bother applying for one. (To put down on a second house or put money towards home repairs, for example. Or to consolidate other debts, never take out a home equity loan.)

What size of homeowner loan can I get and why?

You may usually get a larger loan amount with a home equity loan than you would with an unsecured personal loan. Lenders like collateral because it gives them some certainty that they will get their money back if they fail to repay the loan.

It's possible to get a secured loan for any amount between a few thousand and several hundred thousand pounds. Equity in your home, rather than the property's market value, will be used to calculate how much of a loan you qualify for. Having a mortgage on your home makes this a priority.

If your home is now worth £300,000 and you owe £200,000 on your mortgage, you would have £100,000 in equity. As a result, you will be limited in the amount of money you may borrow to £100,000 (rather than the entire amount).

Should you borrow against your house if you need a bigger loan? Lenders will look at your salary, credit history, and other details to determine how much they will lend you. Remember that you should borrow just what you really need.

Borrowing more money than you really need is a waste of money since interest rates remain the same regardless of the amount borrowed.

Homeowner loans – Buying guide

Let's talk about market strategies now that you understand whether borrowing against your home is good. Mortgage loan rates vary greatly. Using an online broker is one suggested route. You could boost your chances of getting accepted for a loan at a reasonable interest rate by raising your credit score with these establishments. 

First, calculate how much you want to borrow in proportion to the value of your property, and then, factor in the interest you'll have to pay each month. It's a good idea to do some independent research beforehand.

Doing a home loan comparison may give you a fair sense of the rates available, and then your broker might perhaps surprise you with an even better bargain.

When taking out a loan against your property, what are the potential drawbacks, benefits, and key considerations? What determines the loan amount is: 

  • Your FICO Score.
  • Consider both your income and any current debt.
  • The value of your home.

1. ★ Cons

✔️ If you can't afford the mortgage payments, you might lose your house.

✔️ It might take more time to set up than a regular loan would.

✔️ The complexity of securing a loan against property may result in higher fees and interest rates.

✔️ If you extend your payments over a longer length of time, you may wind up paying more interest in the long run.

✔️ A loan with a variable interest rate means that your payments might go up or lower from month to month instead of an APR.

The biggest downside is that your possessions might be stolen. By pledging your property as collateral, you are giving the lender the right to take possession of it if you fail to make your loan repayments when they are due. This implies that the lender has the right to reclaim the collateral and sell the house if you default on the loan's payments. 

2. ★ Pros

❌️ Increased borrowing capacity without needing to be Elon Musk; a secured loan may be your only choice if you need to borrow a substantial sum (above £25,000).

❌️ If your low credit prevents you from getting personal loans, this could be a viable alternative.

❌️ A secured loan might provide you with a better interest rate than unsecured loans.

❌️ Loans collateralized by property are typically extended to accommodate more drawn-out repayment schedules.

3. ★ Expected rates

If you need a large loan, a secured loan may be preferable since the lender has something tangible to secure the loan against in addition to your promise to repay (Best Savings Bank Accounts).

With interest rates on personal loans reaching historic lows, this is increasingly not the case. The interest rate gap between secured and unsecured personal loans is narrowing, so it's important to weigh the costs of both before deciding.

4. ★ Credit score

You may have greater luck asking for a secured loan rather than a traditional personal loan if you have a low credit history. The lender has less risk with secured loans since they have some collateral to seize upon failure.

This may seem like a good idea at first, but if you have a history of credit problems, you should be very wary about asking for a secured loan or taking out a mortgage advance on your home.

The interest rate you pay on a secured loan against your house will likely be rather expensive if you have a low credit score. 

Should you get insurance to safeguard your income?

It is a good idea to consider income insurance if you want to raise the amount of money you borrow against your property. If losing your work will leave you unable to pay your current mortgage, expenses, plus the new loan, then you should consider getting income protection.

5. ★ Alternatives

You may have greater luck asking for a secured loan rather than a traditional personal loan if you have a low credit history. The lender has less risk with secured loans since they have some collate

Summary

What other options exist besides taking out a mortgage loan?

Always look into your alternative borrowing options before committing to a secured loan. As an alternative to getting a new secured loan, you may refinance your home, for instance. 

You may take out a mortgage for a larger sum than you presently owe and utilise the extra cash for any purpose. How much you're able to borrow may depend on the answers you provide when lenders inquire about your plans for the additional funds.

Be sure you know the costs associated with remortgaging before your existing arrangement is up. On the other hand, unsecured loans could provide you with the funds you want with less hassle. 

Lenders may make a judgement based only on your financial situation and credit history, without requiring collateral. An unsecured loan might allow you to borrow up to £50,000, however, the exact amount you qualify for will vary from lender to lender.

The money you need may also be borrowed via other means, such as:

  • You may get a bigger unsecured loan from several lenders if you use the money for home upgrades.
  • An example of a “social loan” would be borrowing money from “online savers”. As the lending expenses of P2P lenders are lower than those of conventional lenders, the interest rates on these loans are generally much lower.
  • If you're looking for a borrowing option that gives you greater leeway, a credit card could be for you. If you're looking for a credit card and aren't sure whether any of the options will match your goals.

Should you borrow against your home? View your options first. Once you've determined that a secured loan is your best option, you should seek for the most affordable rate you can. If you want to save money on your borrowing expenses, you should get a secured loan with the lowest interest rate you can find.

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