Securing a loan against your home? Make sure it's right for you

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It's not always easy to get credit these days, as many banks and building societies have tightened up their lending policies. If you’re a homeowner, you may be able to secure a loan against it.

Secured loans - also known as homeowner loans, home loans or second-charge mortgages - are a form of loan in which your home is used as security. They can be handy if you need a large sum of money but they aren't without risk.

What are the advantages?

  • The amount of money you can get access to at relatively short notice, depending on the lender. Unsecured personal loans typically only allow you to borrow up to £25,000; homeowner loans can go up to as much as £100,000- and in some cases, much higher.
  • The interest rates are often appealing - and could be lower than you would pay on unsecured borrowing.
  • The repayments are more amenable. You'll pay off the loan in a series of regular payments over a long period - perhaps even 15 to 20 years (as opposed to a normal period of five years with the unsecured loan). A longer term like this usually means the monthly repayments are lower. It may also mean, however, that the amount of interest paid over time is higher.

And the disadvantages?

  • Taking out a homeowner loan comes with a major risk - if you default on your payments, the lender can repossess your home in order to recoup the debt. So while it's called a secured loan, it's not you, the borrower, who's secured, it's the lender.
  • You may find yourself paying hefty fees up front.

What do you need to keep in mind?

  • You may find wildly different rates being offered by lenders - and they can be variable, which means they move up and down according to the economic climate or the lender's own criteria. Always check whether the rates are fixed or variable, and factor in rate rises when you're working out your budget. A fixed-rate will give you more certainty when it comes to budgeting.
  • Secured loans may not be the most flexible option; there's almost always a penalty if you clear your debt early.
  • You may need a glowing credit score. This will dictate the size of the loan and the interest rate you're offered. That said, secured loan providers may be more sympathetic to borrowers with poor credit scores than other lenders: with your property in the equation, their risk is reduced.
  • Lenders will also look at your income and other financial commitments, and how much equity you have in your home, i.e. how much of it you own. If you live in a £400,000 home, but still have a £370,000 mortgage, even if you have a good credit score, you might not be able to borrow £100,000.
  • Finally, can you afford it? You should only ever consider taking out a secured loan if you're sure you can maintain your payments, you have access to another source of credit if something goes wrong, or you have no other option. With a secured loan you're risking losing the roof over your head.

If you're planning to apply for a secured loan, it's important to shop around and find the best deal possible for you. Lenders will take in a range of criteria including the equity in your home, and your credit record. Before you apply for a loan it's worth visiting a price comparison site, such as Experian to compare products.

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