Homeowners have huge sums of money tied up in their houses, and it is possible to release a portion of this equity by accessing a loan that is secured against the property. If you own a property and you need to borrow a lump sum, you may be eligible to borrow against your house.
Individuals considering this option may wonder exactly how much can I borrow against my house? The answer varies depending on your circumstances. In this article, we’ll cover how much you may be eligible to borrow, along with the associated processes and key considerations for homeowners.
Borrowing against your home allows you to raise a lump sum without having to physically sell your property. If you’re interested in this option, you’ll need a solid understanding of the relevant procedures, ensuring that you comprehend the related obligations, risks, and where you stand legally. To discuss your options today, contact our conveyancing lawyers at Bird & Co Solicitors.
Borrowing money against your house
Homeowners who own all or part of their property have the option of borrowing against equity. The amount of equity in a property is calculated by working out the difference between the value of the property and the amount left to pay on the mortgage. The equity is calculated using the current value of the property, as opposed to the value of the home when purchased.
For instance, if a property is valued at 250,000 and the homeowner has £50,000 remaining on the mortgage, the equity amount would be £200,000. In this case, your loan would be secured against the £200,000 value of the house that you currently own.
What is the most you can borrow against your house?
Lenders who offer loans against a house rarely allow people to borrow the maximum amount of equity on the property. Generally, it’s possible to access up to 80-90% of the equity available, depending on the circumstances.
When you are borrowing against your house, the amount largely depends on the value of your house and the equity that you have. Other factors that impact the amount that you can borrow and the interest rate include:
LTV Ratio
LTV refers to ‘loan to value ratio’. This metric is used by lenders to assess the risk of loans on a house. The LTV represents the loan size relative to the value of the property, or the equity owned, shown as a percentage.
Property owners can figure out the LTV by dividing the amount that they’d like to borrow by the sum of equity.
For instance, if your equity is £350,000 and you are looking for a loan of £175,000, then the LTV would be 50%. If you still have an amount to pay on your mortgage, this amount must first be deducted before you can calculate the LTV.
Higher LTV rates mean increased interest rates, and this is because lenders associate a higher LTV with more risk.
Credit score
If you are attempting to take out a loan against your property, you’ll find that lenders will also take your credit score into consideration. If you have a poor credit history, you may find it harder to secure a loan, and you’ll likely be charged higher interest rates.
Borrowing money against your house is possible if you have bad credit, but the concern is that your loan will be secured against your home, and so if you default, the lender has the legal right to repossess the property.
Income and affordability
Lenders will also take into consideration the homeowner’s income and affordability. Regardless, these loans are easy to qualify for because the property is used to secure the loan, and therefore, there’s less risk to the lender.
Homeowners must be certain that they will be able to make the repayments before they commit to taking out the loan. If the homeowner fails to repay the loan and the situation escalates, the lender may take legal action.
How much equity do I have if my house is paid off?
If your house is paid off, the amount of equity you have is equal to the current value of your home. For example, if you’ve paid off a mortgage of £400,000, you’ll have £400,000 in equity.
It’s worth noting that just because you have a certain amount of equity in your home, it doesn’t mean that you’ll be able to take out a loan against that full amount.
How do I access the equity in my home?
To access the equity in your home, there are several different options available:
Secured loan
These types of loans are secured using the value of your property, also referred to as homeowner loans. Accessing a secured loan allows homeowners to benefit from longer payment periods and receive larger amounts compared to standard loans.
Home equity loan
This type of loan acts as a second mortgage, and the homeowner must repay the amount borrowed over a set period of years. A home equity loan is similar to a first mortgage; however, the rate will be slightly higher.
Home equity line of credit
A home equity line of credit permits homeowners to draw funds at their convenience and then pay back the amount with a variable interest rate. This option tends to come with higher interest rates compared to home equity loans.
Cash-out refinance
This route is a type of mortgage refinancing, allowing homeowners to transfer their equity into cash. The property owner can take out a new mortgage for higher than their first mortgage and receive the difference in cash.
Equity release
An equity release allows homeowners who are over the age of 55 years old to access the money that they have tied up in their property.
Homeowners have two routes to choose from, including a home reversion or a lifetime mortgage. The first option involves selling the property (or a portion of it) to an equity release provider and continuing to live in the house for free. The second option means securing a loan against your property, permitting you to release tax free money.
If you’re interested in getting an equity release on your property, contact our equity release solicitors at Bird & Co today.
What are the benefits of borrowing money against your house?
Taking out a loan against property allows buyers to access larger sums of money. Often homeowners can secure up to 70% of the value of their property. Interest rates are often lower than conventional loans, and homeowners also have the potential to benefit from longer repayment periods. These types of loans are generally easy to access, lenders receive a guarantee and are therefore more likely to offer large loans.
When should you borrow against your property?
There are many different reasons why a homeowner might decide to take out a loan against their house. For instance, if they need access to a larger sum than they could get with a standard personal loan. It could be that the homeowner is looking renovate their home or secure a deposit to purchase a second property. If you are entering the later stages of your life and looking to free up some cash to support your retirement, an equity release is a great option.
These are some of the most common reasons to borrow against your house. However, homeowner loans and home equity loans can be used for any purpose.
What is the minimal amount for a home equity loan?
The minimum amount to get a home equity loan is £10,000 for the majority of lenders, though some companies ask for a £15,000 minimum. To be eligible for a loan, most lenders state that your house must be valued at £70,000 at least.
Are home equity loans tax deductible?
The interest that you’ll pay on a home equity loan is tax-deductible under the right circumstances. For example, if you are using the loan to improve, build or buy the property that was used as collateral for the loan. If you used the loan for another project or for emergency expenses, you will not be eligible to deduct interest on your loan.
What should you consider before taking out a loan against your home?
1. Your financial situation
Before you take out a home equity loan, you should consider your financial position. It’s important that you are certain that you can pay back the loan over the set time frame. Attempting to take out a loan against your house when you are in a financially vulnerable position is not advised, and doing so could put your home at risk of repossession.
2. Securing an attractive interest rate
When you’re taking out a loan, you’ll want to try to secure the most attractive interest rate possible. It’s best to do a little research before you apply for a homeowner’s loan, this way, you’ll be in a better position to judge your best options.
3. Consult an equity release solicitor
If you’re considering applying for a homeowner’s loan or a home equity loan, it’s best that you get in contact with a conveyancing lawyer or equity release solicitor. A specialist solicitor will be able to handle the transaction on your behalf, ensuring that your rights and interests are protected.
Talk to Bird & Co Solicitors about borrowing against your property
If you’re looking to borrow money against your property and are wondering how much can I borrow against my house, our conveyancing solicitors at Bird & Co can help. We can offer the legal information and advice that you need and support you throughout the entire process. We appreciate that taking out this type of loan can feel a little daunting and that you may not fully understand the processes and obligations involved.
To discuss the possibility of securing a loan against your home, get in touch with our expert team at Bird & Co Solicitors.
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