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What is a homeowner loan and what is it used for?

Paloma Kubiak
Written By:
Paloma Kubiak

Homeowner loans – or second charge mortgages – have boomed in the last few years. We explain what they are and when they may be suitable for you.

If you already own a property and are looking to borrow more money, a homeowner loan – or second charge mortgage – may be an option for you.

It’s a loan which is secured against your property, and is an alternative finance option to remortgaging or applying for an unsecured loan such as a credit card.

According to trade body the Finance and Leasing Association (FLA), £119m of homeowner loan business was reported in February 2022 – the highest volume in two years.

And in the year to February 2022, it reported £1.2bn of new business, with more than 27,000 agreements signed.

Given its growth, could a homeowner loan work for you?

What is a homeowner loan?

A homeowner loan allows you to borrow money which is secured against your existing property. It is based on the equity you have built up in your home, and is separate to your existing mortgage.

When you take out a mortgage, your lender has a ‘first charge’ on your property in case you default on your repayments.

With a homeowner loan, the lender is essentially second in line when it comes to recovering any outstanding debt.

It’s important to remind you that you may lose your home if you fail to keep up repayments.

What is it used for?

A second charge mortgage can be used for almost any purpose, but typically, the money borrowed is used to re-organise personal finances. This could typically include debt consolidation or home improvement – two of the most common purposes for our customers at Pepper Money.

But they are also used to cover wedding costs and for children, such as university fees or private school fees.

Since launch, we’ve advanced funds totalling £1bn to help meet the needs of our customers, making us the leading second charge mortgage provider across England, Scotland and Wales.

How does it work?

At Pepper Money, we offer homeowner loans between £5,000 and £1m with a repayment term of three to 30 years, subject to individual circumstances and credit checks.

You can borrow up to 100% of your property’s value – that is the equity after your existing mortgage balance is taken into consideration. The minimum property value is £75,000, and the average amount borrowed by our customers stands at £40,000.

Pepper Money offers competitive fixed, discounted and variable rate products but the actual rate we offer depends on your personal circumstances. The average loan rate stands at 5.89%.

We also offer flexible overpayment options, without penalty to enable customers to either reduce their term or reduce monthly repayments.

Why could a homeowner loan be suitable now?

With rising interest rates, it may be more suitable for some people to choose a second charge mortgage over remortgaging.

More and more people have increased equity in their homes as house prices continue to rise, which enables them to borrow more with a second charge mortgage.

It may also be a good option for borrowers who have been refused a remortgage or an advance from their existing mortgage lender.

Other scenarios include borrowers who are on cheap mortgage rates such as lifetime trackers around 2%. If you were to remortgage, the lender may insist you remortgage the whole amount, meaning you’re put on a higher rate.

Furthermore, a remortgage can take several weeks, while figures from second charge broker, the Loans Warehouse, revealed the average completion time stood at 23 days in February 2022.

And for those considering an unsecured loan such as a personal loan or credit card, the amount you can borrow is typically much lower.

See Pepper Money’s homeowner loan calculator to find out what your repayments might like look each month, and how much you could end up paying if you apply.

To apply for a homeowner loan with Pepper Money, visit our homeowner loan page or call us on 0808 239 1496. Our homeowner loans are also available through selected brokers.