Loans Guides

Homeowner loans

What are the advantages and disadvantages of homeowner loans, and how do you find the best deal? (Updated 16/7/09)

When you take out a secured loan, or “homeowner loan” you are guaranteeing the loan by assigning to the lender the rights to your house if you default on your loan.

There’s a lot at stake when you enter into a homeowner loan agreement, so don’t sign up unless you’re 100% sure that you will be able keep up with repayments.

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As a result of the dramatic property price falls that the nation has suffered during the recession, many lenders have withdrawn from the secured loan market as property is no longer seen as providing as much security as it once did.

However, there are still secured loan deals available and in this guide we look closely at the pros and cons of getting a secured loan as well as offering top tips on finding the cheapest deal.

• What are the advantages of homeowner loans?
• What are the potential drawbacks of homeowner loans?
• Payment protection insurance
• Our recommendation

What are the advantages of homeowner loans?

There are several advantages to taking out a homeowner loan:

• You can often borrow more with a homeowner loan than with an unsecured loan.
• Homeowner loans are often cheaper than unsecured loans – because the loan is secured on you house it is seen as less risky by lenders so they are likely to offer you a better interest rate.
• As a result of the credit crunch lenders are more selective about who they will lend to and people with a less-than-perfect credit history may find they have a better chance of being approved for a loan if they are willing to secure their home against their debt.
• Homeowner loans can usually be arranged without the punitive fees that standard remortgages tend to attract.

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What are the potential drawbacks of homeowner loans?

Homeowner loans do have some serious potential drawbacks, which you need to consider:

• Consistently defaulting on payments to the point where your house is repossessed is one of the biggest drawbacks possible. You must be certain that repayments will be met, and this can’t be emphasised enough.
• Loans for sums greater than £25,000 are unregulated by the consumer credit act, and should therefore be heavily scrutinised by a legal body before being entered into.

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Payment protection insurance

You can take out payment protection insurance (PPI) that will cover your loan repayments should you have to take an extended unpaid break from work due to illness. Don’t settle for the PPI that’s offered to you alongside the loan though. Once the loan has been approved, shop around for the PPI.

There are PPI specialists that will offer to undercut your loan provider. Check also that you actually need PPI - you may already be covered by a life or health insurance plan.

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Our recommendation

If you decide a homeowner loan is the right choice for your circumstances, follow our top tips to get the best deal:

• Check your credit report before you apply for a loan – Not only will checking your credit report reveal to you how you look to prospective lenders, it also gives you the opportunity to correct any information that is wrong and give yourself the best chance of being approved.
• Make a budget – Make a note of you income and outgoings and work out carefully how much you can afford to borrow without stretching you finances. It’s crucial that you can afford you monthly repayments, especially when missing them may put your home at risk.
• Don’t borrow more than you need – While it may be tempting to add a little extra to the loan amount to treat yourself, don’t do it. Borrowing more will cost you even more in interest in the long run, and you’ll likely be in debt for longer, so only borrow what’s necessary and resist spending more of tomorrow’s money today.
• Compare homeowner loans to get the best deal – When taking out a homeowner loan it is essential that you compare loans to find the best rate available. When comparing loans make sure you look carefully at the APR as well as checking for any additional fees.
• Shop around for PPI – If you decide that you want to take out payment protection insurance, don’t buy this from your loan provider. Instead, shop around for a better offer.
• Watch out for payment holidays – Some lenders may offer to defer your repayments for a few months at the start of the loan. However, you will still be being charged during this time and your future repayments will be larger to compensate. Your total amount repayable will be larger too, so avoid this if possible.

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