Should I take out a loan against my house?

How do loans against property work?

The idea of a loan against property is that you put your home (or a different property you own) up as collateral against the amount you borrow. This means that if you can’t repay the loan, the lender can have your property repossessed and sold in order to repay your debt. This makes them a risky form of borrowing, so we’d recommend exploring other options first.

The main ways of borrowing against a property are remortgaging and secured loans (often known as second-charge mortgages).

In each case, the lender will look at the value of your property (or if you have a mortgage, the amount you’ve paid off), alongside information about your income and credit history to assess how much you can borrow.

Secured loans are paid off (plus interest) in monthly instalments. These types of loans usually with a variable interest rate, meaning the amount you repay each month can go up and down.

How much could I borrow against my house?

How much you’re able to borrow against your home will essentially depend on:

• how much equity you’ve built up in your property

• how much your home is worth

• how much you can afford to repay each month.

For example: if your home is worth £250,000 and you have £150,000 left to pay on your mortgage, you have £100,000 in equity. This means you’ll be able to take out a loan secured against that £100,000, as that’s the bit of the house that you technically own – though you won’t be able to borrow the full £100,000.

As a general rule, you can borrow larger amounts if you secure the loan against your home than you can with a personal unsecured loan because it’s less risky for the lender, and more risky for you (plus, because you’re repaying the loan over a longer period of time, you’ll often pay a lot more in interest, even if your monthly repayments are cheaper).

What are the different types of loans against property?

There are three main ways to take a loan out against your property. Each work on the basis that you’re borrowing against the equity you’ve built up in your home:

• Secured loan (also called a ‘homeowner loan’, or ‘home equity loan’). These are fixed-term loans, secured against an asset (usually property, but some lenders accept other high-value assets too).

• Second mortgage (also called ‘second charge mortgage’). This is a separate loan agreement to your first mortgage, so you make monthly payments towards both at the same time.

• Remortgage. When your current mortgage deal comes to an end, you can use the equity you’ve built up in your home to borrow more money. Your lender may ask what you plan to use the extra money for, and this can affect how much you can borrow. However, this type of borrowing is usually cheaper than a secured loan or second mortgage.

Who are homeowner loans suitable for?

Secured loans (or homeowner loans) are only available to those who own at least part of a property. But, even if you fall into this category, homeowner loans are only really suitable in very limited circumstances, and we’d only suggest they’re suitable in relatively limited circumstances.

For a full breakdown of the reasons why, head to our Secured loans guide, or jump to our suggested alternatives. If you are determined to get a secured loan, then only do it to consolidate debt and only if it means you’ll end up paying less for your debt (and won’t run other debts back up alongside it).

What are the pros and cons of homeowner loans?

Homeowner loans are secured loans separate from your mortgage. They’re often promoted as a convenient way to consolidate your debts, or to access large amounts of cash – even if your credit score is less than perfect.

Pros

While we think that homeowner loans should be considered an absolute last resort, there are reasons why some people consider them:

• You don’t need a perfect credit score to get one. Secured loans present less risk to lenders, so they’re more willing to lend to those with poor credit histories.

• You can borrow more. While unsecured loans tend to be limited to amounts up to £50,000 (£25,000 with some providers), secured loans can be in the £100,000s – depending on what proportion of your home you own, and how much it’s worth.

• You can borrow over a long period. Repayment plans for secured loans tend to last between five and 20 years. This means your monthly repayments can be lower than with other forms of borrowing (though you’ll likely repay more overall, see below).

Cons

Despite the above factors, the cons often outweigh the pros:

• Your home is at risk. If you don’t or can’t pay the loan back on time, the lender can apply for a court order to sell your home to get back any money it’s owed.

• You’ll pay extra fees. Secured loans come with a number of additional fees on top of the loan amount and interest. These can include: arrangement fees, a valuation fee, broker fees and early repayment charges.

• They’re often expensive. As you’re making repayments over a longer period you’re likely to pay a lot more interest overall compared to a secured personal loan. Before you take out the loan consider the total cost of borrowing, and what you want to buy: is it worth the amount PLUS the interest and fees you’ll pay?

• The amount you pay each month can change. Secured loans often have a variable interest rate, which means that amount you pay each month can go up or down depending on the Bank of England base rate and your lender’s own policies.

Should I take out a loan against my property?

Before considering taking out a loan against your property, make sure you look into all the available alternatives first. You should always consider loans secured against your property as a final option. When you’re weighing up your options, think carefully about:

• What you need the loan for

• Whether it’s the cheapest way you can borrow the money

• How long you want to make repayments for

• Your credit score

• Your other debt and financial responsibilities

• The level of risk you’re comfortable with.

If you’re still unsure, or you’re struggling to find a good alternative, talk to a financial adviser before you commit.

What are the alternatives to homeowner loans?

In most cases, there will be a cheaper and less risky way of borrowing than securing a loan against your property. What’s best for you will depend on your personal circumstances, and we go through the options in full in our secured loans guide. However, if you’re looking for a quick overview, there are two main alternatives to loans secured against your property:

• Credit cards. If you’re looking to borrow a smaller amount, a 0% credit card could be a cheaper way of borrowing the money than a loan – as you won’t have to pay any interest for a set period of time (sometimes almost up to two years). You’ll also get additional protection with Section 75.

  Or if you’re looking to deal with debt, you may be able to cut the cost of that debt by transferring your debt to a new card which charges 0% interest. Read the full Balance transfer credit card guide to find out how.

• Personal loans. These are cheaper and less risky for those who can get them. You can use them in the same way you would a secured loan for additional borrowing, though it’s worth noting that you can usually only borrow up to £25,000 on an unsecured loan (some lenders offer loans up to £50,000). For full details on how they work and where to get the best rates, see our Cheap personal loans guide.