How do unsecured home equity loans work in the UK?

There are usually two types of loans: secured loans and unsecured loans. Unsecured loans are those that do not require any type of security to be pledged to the lender. However, a secured loan is the one where the potential borrower would need to secure a guarantee or security against which the lender will lend money. Usually, secured loans are the better choice of the two because they come with many benefits, big and small, like lower interest rates – but you have to put up one of your valuable assets as collateral. However, you can easily take out a home equity loan without using your property as a mortgage. So how do these home equity loans work? In this article we will discuss:

  • What is an unsecured home equity loan?

  • How does it work?

  • Characteristics of an unsecured home equity loan

  • Why should you apply for this?

  • How to choose the right loan?

What is an unsecured home equity loan?

A home equity loan can be taken out by people who have a home in their name. With an unsecured home equity loan, people can get a loan for a certain amount of the total value of the home without having to guarantee their home to the lender. One must be over 18 years of age and should also have a steady source of income to be eligible for the unsecured homeowner loan. How does an unsecured home equity loan work?

Home equity loans are very common these days as they come with certain benefits that are beneficial to the borrowers. The borrower who took out the loan has to pay it back in monthly installments along with the interest. Before taking out an unsecured home equity loan, the prospect should check the availability of the loan and market conditions. They should also make sure they can repay the loan each month. Loans can be applied for different types of real estate like apartments, bungalows, cottages, houses etc. Some of the things that the lender usually takes into account are the applicant’s age, the loan term they can pay, the value of the property, the applicant’s income, and their credit report.

Also, the interest rates on these loans are either fixed or variable depending on the lender. Variable rates can be a bit expensive compared to fixed rates, where the repayment rates remain the same throughout the life of the loan.

Some of the key features of home equity loans

The value of the loan will be a certain percentage value of the entire property, which is negotiable.

  • The term of the loan is extended from 1 year to 7 years depending on the amount of the loan.

  • The interest rate is either fixed or variable.

  • A thorough affordability assessment is conducted, taking into account income and creditworthiness, and then a home equity loan eligibility determination.

Usually, there are certain lenders who charge a certain amount as fees for completing the loan. Research can be done before choosing the lender that does not charge any additional fees.

Some of the fees that are included in the home equity loan are:

  • legal fees

  • brokerage fees

  • Withdrawal Fees

  • Evaluation Fees

After a lender and loan have been selected, several steps must be completed before the loan is finalized. As a rule, these steps can take 4-5 weeks, after which the loan amount is transferred to the debtor’s account.

  1. The lender checks the creditworthiness and ensures that the loan can be paid.

  2. The lender then examines current payslips to determine the regularity of an income.

  3. They will then check the house’s register to confirm ownership.

  4. Finally, they calculate the value and equity of the property before setting the loan amount.

After the loan is granted, the monthly EMIs of the loan must be paid. If you repay the loan early, there will be a certain early repayment or repayment fee. Homeowners can also take a payment holiday with the lender’s approval, but in such cases the cost of the loan increases.

Why should people apply for home equity loans?

Some of the reasons people take out home equity loans are listed below:

  1. Financing: With the money you receive, you can fund a large or small expense, depending on your needs. You can also use it for your wedding expenses or to finance your dream vacation.
  2. Business: They can start a business with their loan and invest in it with the amount. This makes it easier to repay the loan, since the income from the company can be used to repay the loan and the investment can also successfully secure the future of your company.
  3. DIY: Renovations and improvements can be made in the house as these renovations are usually expensive. In order to increase the value of the house, timely renovations and improvements can be very helpful in increasing the overall value of the property.

How to choose a home equity loan?

Finding the right type of loan can be difficult as there are many options to choose from. Some of the steps that should be taken when choosing a loan are:

  1. First, determine the amount to be borrowed for this loan.

  2. In the next step, the value of the property is determined according to the current real estate trend and the outstanding mortgage lending value is calculated.

  3. After that, determine the number of installments that can be paid each month, and after that determine the term of the loan.

  4. Next, have records like house register, credit report, etc. ready as these will be needed by the lender to make their decision.

  5. Finally, speak to an agent to obtain a marketable homeowner loan for the property