If you’re thinking about borrowing more money as a homeowner, you might be wondering: does a homeowner loan affect your mortgage? In many cases, a homeowner loan won’t affect your mortgage. However, if the terms of your mortgage say that you are restricted from further secured borrowing, a homeowner loan could potentially affect your mortgage. Consider speaking to your provider before applying for a homeowner loan.
In this guide, we’ll explain how homeowner loans work alongside your mortgage. We’ll cover:
- What a homeowner loan is
- How a homeowner loan could affect your mortgage
- What may be useful to consider when deciding whether a homeowner loan could be right for you
By the end, you will hopefully have a clearer understanding of how a homeowner loan could potentially affect your mortgage. This may help you make more informed decisions about your finances. Please note, this article is for guidance purposes only and is not financial advice.
What is a homeowner loan?
A homeowner loan is a way to borrow money using your property as security. It is also known as a secured loan or second charge mortgage.
A homeowner loan sits alongside your existing mortgage (also known as a “first charge”), rather than replacing it. This is why it’s often called a “second charge”.
If you take out a homeowner loan, you’ll keep making your usual mortgage payments, while also repaying the homeowner loan in instalments, which is usually monthly.
You can find out more about homeowner loans in our guide: What is a homeowner loan?
Does a homeowner loan affect your mortgage?
A homeowner loan doesn’t usually change your mortgage agreement. Your original mortgage stays in place with the same lender, terms and interest rate. Remember, if your mortgage terms do not permit it, you may be restricted from further secured lending.
However, it could still have an impact in a few ways:
- Your total debt will increase
- Your monthly outgoings may go up
- Your affordability may change
- Your equity may decrease
Lenders will look at your circumstances, against their own lending criteria, including both your mortgage and any secured loans.
Let’s break this down into more detail.
- Your monthly payments may increase
When you take out a homeowner loan, you add another monthly repayment to your budget. You’ll have a homeowner loan repayment, as well as your existing mortgage payment.
It may be useful to take steps to make sure both are affordable, not just now but in the future too. Missing payments on either could affect your credit score and put your home at risk.
- Your equity may be affected
Equity is the difference between your property’s value and what you owe on it.
When you take out a homeowner loan, you borrow more against your home. This reduces the amount of equity you have.
For example:
- Property value: £250,000
- Mortgage balance: £150,000
- Equity: £100,000
If you took out a £25,000 homeowner loan, your total borrowing would become £175,000. This means your equity would drop to £75,000.
This is something you may find useful to consider, especially if you’re planning to move home in the future.
- It could affect remortgaging
A homeowner loan could affect your ability to remortgage later on.
When you apply for a new mortgage, lenders will assess:
- Your income & expenditure
- Your credit history
- Your total debt
- Your equity
Having a homeowner loan may limit your options slightly. This is because lenders will factor in the additional borrowing.
In some cases, you may need to repay the homeowner loan as part of the remortgage process. In others, it can remain in place. It depends on the lender and your circumstances.
- It may impact your borrowing power
Because a homeowner loan increases your overall debt, it may reduce how much you can borrow in the future.
Lenders use affordability checks to decide how much they’re willing to lend. This includes looking at your existing commitments.
So, if you already have a mortgage and a secured homeowner loan, there may be less room for additional borrowing as it may not fit their affordability assessment
Does taking out a homeowner loan affect your credit score?
Taking out a homeowner loan may affect your credit score, but not always in a negative way. Here’s how it might work:
- It could have a small initial impact: When you apply, the lender carries out a credit check. This may cause a temporary dip in your credit score.
- It could improve your credit score over time: If you keep up with repayments, this shows lenders you are able to manage credit responsibly. That may help your credit score in the long run.
- Missed payments may cause problems: If you fall behind on payments, it could damage your credit profile. This may make future borrowing more difficult.
Is a homeowner loan right for you?
A homeowner loan may be a helpful solution if you want to borrow money. But it’s not right for everyone.
It may be useful to consider:
- Whether you are able to comfortably afford the repayments
- How it fits with your long-term financial plans
- The impact on your equity
- The risk to your home if you can’t keep up with payments
Take your time to weigh up the pros and cons before making a decision. It might be worth speaking to a financial adviser for guidance. You can also access free, impartial money advice on sites like MoneyHelper, Citizens Advice and StepChange.
You can also read more useful guides on loans and managing your money in our Help & Advice section.
Could you qualify for a homeowner loan from Evolution Money?
At Evolution Money, we offer secured homeowner loans from £5,000 to £105,000 with flexible repayment terms from 3 to 20 years. We’re rated ‘Exceptional’ by our customers on Feefo.
Check your eligibility online today.
All loans are subject to status and eligibility. Terms and conditions apply. Not all applicants will be accepted.
Don’t rush into securing a loan against your home. Falling behind on secured loan repayments may put your home at risk of repossession.
Representative 21.82% APRC (Variable)
For a typical loan of £18,900 over 180 months with a variable interest rate of 18.72% per annum, your monthly repayments would be £335.99. This includes a Product Fee of £1890.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £60,478.00. Annual Interest Rates range between 8.6% to 27.87% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
