How does loan against property work?
A loan against property is a loan which uses your home as collateral. It’s usually used for things like home improvements, as an alternative to taking out a personal loan, or using your credit card.
You can only take out a loan against your property if you own all or part of your home (known as the equity in your property.) You can borrow money in different ways against your property’s value – the main risk being if you don’t keep up with your repayments, you could lose your home because the lender can take action to repossess.
An example of this would be if your property’s value was £250,000 and your mortgage balance is £100,000, so you have £150,000 in equity. You’ve decided you want to borrow £50,000 for a loft extension, to increase your property’s value and hopefully make money when you come to sell the home.
You could borrow £50,000 and use the equity in your property as security on the loan. There are different ways you might choose to borrow this money. One option might be to increase your mortgage with your existing mortgage lender by £50,000 – so your total mortgage would be £150,000.
When you apply for a loan against your property, the lender will look at how much equity you have in your home, your income and outgoings, and your credit score. They’ll then use this to work out how much you can borrow and the interest rate you’ll be offered.
What types of loans against property are there?
The types of loan against property you can take out include:
Secured loan: A secured loan, sometimes called a homeowner loan, is secured to the value of an asset, usually your property (but some lenders will accept other assets as collateral.) This is a fixed term loan, taken out with a bank or loan provider
Second mortgage: With a second mortgage (also known as a second charge mortgage), you use the equity in your home to borrow more money. It will be a separate loan agreement to your first mortgage and sits alongside your first or primary mortgage
Remortgage: If you already have a mortgage on your home, you could remortgage and increase the loan. You can usually only remortgage when your existing fixed or tracker rate mortgage deal has come to an end, as there will typically be penalties applied if you change mortgage deal mid-term
Am I eligible for a loan against property?
To be eligible for a loan against property, it’s important that you meet the following criteria:
Homeowners: To be eligible for a secured loan (or homeowner loan) you’ll need to own property either in part or in full. You’ll also need to meet the lender’s eligibility criteria. This may include things like your income and your credit history, to check you can keep up with monthly repayments.
Remortgage: If you’d like to remortgage (with your existing mortgage lender or a new lender) to increase the existing loan you’re borrowing, you’ll need to meet the lender’s eligibility criteria. Things like how much you earn and your credit score can affect whether your mortgage is accepted.
When should you borrow against your property?
When you should borrow against your property will depend on your personal circumstances and how much money you’re looking to borrow.
Before you consider borrowing against property, it’s important that you do your research. While you can look at the housing market (and compare housing prices), it’s difficult to time the housing market and when is ‘best’ to buy property. It’s a good idea to make a decision based on your personal, financial situation.
Borrowing against your home can be risky, as if you struggle to meet your repayments, you’ll be putting your property at risk. Reasons to borrow against your property include:
- If you need to borrow a larger amount of money than a standard personal loan, and want a long repayment term
- If you’re looking to make home improvements/renovations, or need a deposit for a second property
It isn’t recommended to borrow money against property to pay off existing debt.
Alternatives to loan against property
While taking out a loan against property can be the right option for some, it does come with potential risks. There are other options available, from personal loans to credit cards, which work as an alternative to a loan against property.
A credit card lets you borrow money from a bank or building society, which can be used to pay for goods and services upfront. You’ll then pay this money back (known as your balance) in monthly repayments. Standard credit card interest rates tend to be higher than those on personal and secured loans, but there are many 0% interest deals available.
With a loan against property, you run the risk of losing your property if you can’t keep up with repayments. If this a worry for you, an unsecured loan (personal loan) could suit you better. Unsecured loans (or personal loans) don’t require you to put up any asset of yours as security. Instead, the interest rate you’ll be charged and the amount you can borrow will depend on your credit rating. With an unsecured loan, you can borrow money without your property being affected.
Compare loans today
Taking out large loans can be difficult to navigate, so we make comparing easy with our comparison tool. Whether you’re after a secured loan against your home or are looking for a personal loan, we’ll give you a tailored list of options for you to choose from.
Simply tell us a little about your financial situation and what kind of loan you’re looking for, including what you’ll be spending the funds on, and we’ll give you a list of competitive offers to date. Once you’ve decided, you can click through to the provider and get the process started.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.