Should I Borrow Against My House?
In thinking about and applying for a loan, one of the many questions we ask ourselves is:
* How much of a loan do I need?
* What is the loan to be used for?
* What are the payments going to be for the loan?
Strangely enough a lender is going to ask some of the same questions, although they may be the ones dictating the payment amount, as they are the ones who determine what interest rate you will receive.
Interest rates for loans can be based on a few factors:
* Your credit score. Good or high credit scores get lower interest rates.
* What the loan is to be used for. Such as is it a personal/unsecured loan, or a secured loan, secured by collateral such as a car or property.
* The term of the loan. Some shorter term loans have higher interest rates, and some have higher rates. I know it sounds complicated, but it can depend on if the lender is looking to get paid back quicker and feels that is less a risk to them, and also it can tie in with credit scoring.
Secured loans also can tend to have lower interest rates, again due to their being collateral for the loan, so if you need a loan, and have equity in a property, pledging that equity for a loan, may get you a lower interest rate.
Which is in essence taking out a loan against your property using the equity you have.
What is equity?
Equity in a property is the difference between what you owe on a property (the balance on the mortgage), and the value of the property.
A formula to determine equity might look like this:
Value of the property – any outstanding mortgage(s) or charges on the property = Equity
An example may be you have a property valued at £200,000, and you have a mortgage balance of £100,000, which means you have £100,000 in equity in your property.
If the property were valued at £175,000, then you would have £75,000 of equity in the property.
You are sitting on a mountain of money!
Sort of, it is the realising of that money that is key.
So how do you access that equity, that mountain of money you have?
In two ways:
* Sell the property.
* Re-mortgage or borrow against the equity.
Not everyone wants to sell their house to access the equity they have, so re-mortgaging or borrowing against the equity is a better option, or is it?
To Borrow Against My House or Not…That is the Question
In answering this question we need to look at three (3) things:
* The benefits
* The risks
If you are looking to take out a loan to do repairs or improvements to a property, borrowing against the property may be a good option.
However, the same risks and benefits and alternatives still apply.
The benefits of using a property to get a loan are varied, one is that you may be able to borrow more, but this will depend on how much equity you have in the property. Many lenders will only lend a percentage of the equity you may have.
If you have £100,000 in equity, a lender may only lend 70% of this or £70,000.
If you have £20,000 in equity, 70% is £14,000.
Should you need to borrow a higher amount, you will need to look at other options.
Another benefit is the interest rate and term of the loan; you may receive a lower interest rate as it is a secured loan. You may also be able to have a longer term to repay the loan, both of which lower the month payments.
As borrowing against a property is a secured loan, someone with a lower credit score may still qualify for the loan.
The main risk of borrowing against your home is that if for any reason you fail to pay the new monthly payments, your property/home is at risk of being repossessed.
What can happen is you still have your original mortgage payment each month, and now in addition to this payment, you have another secured loan payment, which is secured against the property.
Failure to pay either, could result in repossession.
There are alternatives to using your home as a basis for a loan, even with bad credit.
You could consider an unsecured personal loan for what you need. It does not change the fact you will have another monthly payment, but if you struggle to repay the loan, your property is not at immediate risk.
If you cannot qualify for a personal loan, such as due to bad credit, or a lower credit score, there are guarantor loans which could help as well.
Loans that are based on affordability and also having a guarantor. Bad credit is not an issue, and the loan is not secured by your home/property.