Should you borrow against your home?
Here is what your need to consider before making this decision.
How can I borrow against my home?
There are 2 main ways that you can borrow money against your home:
A secured loan: A loan that is secured against the value of an asset, usually your property
A further advance: Where you borrow more money alongside your mortgage, but the additional funds will be secured against the value of your home
Which ever you choose remember you are putting your home forward as a guarantee that you will repay the money you have borrowed in full and on time.
What are the risks?
The main drawback is that you are putting your property at risk.
By offering your home as security you are giving the lender a legal claim to your property should you be unable to repay your borrowing for any reason at a later date.
This means that if you fail to keep to the agreed repayment plan, the lender could repossess your property or force the sale of your home in lieu of repayment.
What are the benefits?
There are two main benefits of applying for a secured loan; potentially cheaper borrowing and the ability to borrow more money.
Ability to borrow more
Due to current UK legislation the most you can borrow using a personal loan is Ј25,000.
However, as these rules do not apply to secured loans you could be able to borrow over the Ј25,000 limit using a further advance or secured loan.
Whether this is actually possible will depend on;
Your credit rating
The amount of equity you have in your property
However, if you need to borrow a large amount, a secured loan could be your only option.
Secured loans can be a cheaper option because the lender has some other source of collateral for the loan, rather than simply your word you will repay, especially if you need a significant amount.
However, this is now rarely the case as personal loan rates have continued to fall over recent years and are now often the cheaper option.
Carefully compare the difference in costs as the difference between secured and unsecured personal loan rates is not as great as it used to be.
Poor credit borrowing
If you have a poor credit record and are unable to secure a standard personal loan you may have more success applying for a secured loan.
Secured loans are viewed as being less risky by the lender, as if you default they could reclaim the outstanding debt from your property.
Although this may sound like an attractive option, if you have had difficulties managing credit in the past you will
need to think carefully before putting your property at risk by applying for a secured loan or taking out a further advance on your mortgage.
Additionally if you have a poor credit rating the cost of your borrowing is likely to be high, even if you are securing the loan against your home. For more help read on finding a secured loan with bad credit read our guide.
Can you afford the repayments?
As well as the cost, there are a number of other things you need to consider before applying for a secured loan.
Your ability to make repayments now and in the future
As with any borrowing, you need to be confident that you can afford the loan and that you'll be able to repay on time each month, especially as your property will be at risk should you be unable to keep up your repayments.
Do you need income protection insurance?
If you are considering increasing your borrowing against your home then you will need to consider if you need to insure your income.
Consider if you could afford to continue to meet your existing mortgage payments, bills and borrowing costs in addition to repayments on your new loan should your circumstances change or you were to lose your job or source of income.
What are the alternatives?
There are a number of other ways to get the borrowing you need including:
An unsecured loan: If you are looking at borrowing under Ј25,000, then a standard personal loan could be a good alternative.
For more help choosing a personal loan read our 9 Top Tips For the Best Deal on a Personal Loan and use our unsecured loan comparison to get the best loan possible.
A credit card: If you want a more flexible way to borrow then a credit card could be an option.
You can check our our credit card comparison to see whether any of the cards available suit your requirements.
A social loan: This option, where you borrow directly from savers online, can offer very competitive rates as social lending websites have fewer costs associated with their loans.
Take a look at our guide: Social Lending - Is It Worth the Risk? for more information and our social lending sites comparison to compare the options available.
How to get the best secured loan
If you decide that a secured loan is best choice for your finances then it is imperative to get the cheapest deal on your borrowing possible.
Look for a secured loan with the lowest possible interest rates to keep the cost of your borrowing to a minimum.
You can compare secured loans side by side using our secured loans comparison table .Source: www.money.co.uk