Finance

How Much Can I Borrow Through Homeowner Loans?

Some expenses can break the bank if you use your savings. Plus, a typical personal loan may not be able to cover such costs. In such cases, a homeowner loan can help you borrow a more considerable loan amount. 

In this article, we’ll learn more about how much you can borrow through a homeowner loan. Read on to find out how much do homeowner loans cost. 

What are homeowner loans?

Homeowner loans are secured loans that you can borrow by leveraging the market value of your property. Unlike other secured loans, you can only use your property as collateral to secure a homeowner loan. So, you must own property to be able to apply for a homeowner loan. 

You can apply for a homeowner loan even if you have some equity in the property you’re paying a mortgage for. Equity is the value, expressed in percentage, of your share in a property you’re paying a mortgage for. You can easily work out your equity percentage by subtracting the outstanding balance on your mortgage from the current market value of your property:

For instance, you’ve purchased a property worth £200,000, for which you’ve paid a 30% (£60000) deposit. You apply for the mortgage to cover the remaining £140,000. So, your equity in the property is £60,000 – 30%.

Homeowner loans allow you to borrow a sizeable amount of money at low interest rates. Since these are secured loans, the interest rate is lower than that of a typical personal loan. However, if you default, the lender can repossess and sell your property to recuperate the loss. Homeowner loans are a high-risk proposition for the borrowers. 

How much can I borrow through my first homeowner loan?

Different lenders have different lending limits. Following are the factors that determine how much you can borrow with a homeowner loan: 

  • Your property’s market value
  • Your credit profile – credit history and rating 
  • Your Income 
  • Desired loan term
  • Age

Lenders usually have a standard criterion with respect to the Loan-to-Value (LTV) ratio. Your property’s market value is another critical factor that determines the lender’s lending decision. The example below will give you a better insight into how the LTV ratio is calculated:

Consider that you own a property worth £200,000 and wish to borrow £90,000. In this case, your LTV would be 45%.

However, if you’re paying towards an ongoing mortgage, subtract the outstanding balance from this mortgage to obtain the LTV. 

Per the above example, your property is worth £200,000, and your mortgage balance is £30,000, leaving you with £170,000. Now, if you borrow £90,000, your LTV will round off by 53%.

How to apply for homeowner loans for poor credit?

  • Work out the loan amount: Work out a suitable and affordable loan amount. If you need less than £35000, an unsecured personal loan may solve the purpose. It is quintessential only to borrow a sum that you can afford to pay back. Assessing your income and expenses will help you get a better idea.  Calculate your LTV ratio: Loan-to-Value is the ratio of the loan amount you need to buy a property to its market value. If you’re planning to buy a property worth £300,000, with a £60,000 deposit, you’ll need a loan to cover the remaining £240,000. Find out your LTV by dividing the loan amount by the property’s market value and converting it to a percentage – 80%. The lower the LTV, the better are your chances of securing a loan at competitive interest rates. 
  • Decide on a loan term: Evaluating your income and expenses will help you calculate the amount you can afford to pay off in monthly instalments. Once you have that amount, it’ll be easier to work out the loan term. 
  • Check your credit score: Your credit history is crucial to the lender’s decision. A self-assessment will allow you to identify and dispute erroneous credit report records and unidentified enquiries. 
  • Apply Online: The easiest and most convenient way of applying for a loan is online. Ensure that you fill in the application form meticulously. Too many separate credit checks in a short span can harm your credit score. Thus, it is important to space out your applications properly to prevent credit damage. 

What will a homeowner equity loan cost me?

To calculate the cost of a homeowner loan, you need to know the loan’s interest rate, plus overhead charges that your lender imposes.

Interest Rate: Interest, in simple terms, is the cost of borrowing a loan. You pay interest on all your monthly payments until the entire loan has been settled. With a long loan term, you will end up paying more money towards the interest. Thus, choosing a loan offer with a low overall interest rate and a shorter loan term may benefit you in the longer run. Lenders mainly charge the following two types of interest rates:

  • Variable interest rate: Variable interest rates can change at any time during your loan term. Although, variable rates are initially cheaper than fixed interest rates.                                         
  • Fixed interest rate: Fixed rates stay constant throughout the loan term.

Additional Fee: Most secured loan lenders don’t impose an additional charge on loans. However, some may charge a valuation and legal fee. Check the loan agreement for these additional or hidden fees before signing it. Below is a list of additional costs that you may incur:

  • Brokerage fee
  • Legal fee
  • Disbursement charges
  • Valuation charge

Tips to follow while applying for personal loans for homeowners

  • Borrow an amount that you’re capable of repaying.
  • Calculate the LTV accurately. 
  • Your loan term should be a practical and feasible decision.
  • Create a budget for monthly repayments. 
  • Prepare a contingency plan to ensure timely repayments.
  • Self-assess your credit score and dispute discrepancies. 
  • Space out your applications to prevent credit score damage. 

Conclusion

Homeowner loans can be a great way to borrow a substantial amount. You can cover the hefty expenses by spreading the cost over affordable monthly instalments for a fixed period with a homeowner loan. 

Remember that homeowner loans are a risky proposition for the borrower, despite the interest benefits. Lenders can repossess and sell your property to recover their loss if you fail to keep up with your repayments. Thus, you must ensure timely repayments. 

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