If you're in a situation where you need funds for your plans but you aren't sure how to go about it, borrowing against your home could be an option worth considering. It's a popular choice these days for accessing extra money.
In this blog, we'll walk you through how it works, what it involves, whether it's right for you, and how much you might be able to borrow using this method.
How does borrowing against your home work?
When you take out a mortgage, your property acts as security. This means if you can't make your payments, the lender can take back the property to cover the loan. However, this is usually a last resort after trying other options.
If you've owned your house for a while and need extra money, you might think about borrowing more against your home. You can do this by remortgaging, getting a further advance, or applying for a secured loan.
- Remortgaging: This involves applying for a new mortgage, either with the same lender but a different deal or with a new lender entirely. It can be useful when you're nearing the end of your current mortgage. However, remortgaging early may lead to losing your current deal and incurring an early repayment fee.
- Further advance: With this option you borrow more money from your current lender, effectively increasing your existing mortgage. While advantageous due to your existing relationship with the lender, you might miss out on better deals elsewhere.
- Secured loan: A secured loan is separate from your first mortgage, but it is also secured against your property. If you find it difficult to repay, there's a chance you could lose your property, much like failing to meet payments on your first mortgage.
In all cases, lenders look at things like your property's value, your income, and your credit history to decide if it's right for you.
Why would you borrow money against your house?
Choosing to borrow money against your home can be a good way to finance different plans. Here are some advantages:
- Less strict requirements: Lenders often have less strict approval criteria since the loan is backed by your property.
- Longer repayment periods and larger loan amounts: Compared to unsecured loans, these can offer longer repayment periods and higher borrowing limits.
- Flexibility: These loans can be used for various purposes, providing flexibility.
- Potentially lower interest rates: Having collateral reduces the risk for lenders. This may result in lower interest rates compared to other borrowing options.
Things to consider before borrowing money against your home
While it can seem like a good idea, it's important to know that any money you borrow comes with risks. Here are some of the risks to think about before you decide:
- Risk of losing your home: Failure to keep up with payments could result in property repossession.
- Higher overall interest payments: Extending the repayment term may lead to higher overall interest payments.
- Impact on credit score: Missed payments can negatively impact your credit score, making it hard to get credit in the future.
How much could I borrow against my house?
The loan amount you can get depends on the lender you select. Typically, these loans can be larger since your property is used as collateral.
Several factors influence your borrowing limit, such as:
- Your income
- Credit history
- Property value
Before applying for a loan, it's good to make sure it aligns with your needs.
Are there other ways to borrow money?
There are alternative ways to borrow money without using your home. The best choice depends on your specific plans and situation. Here are some other options to consider:
- Unsecured loans: These loans don't need your property as collateral. They can be a suitable option if you prefer not to put your home at risk. However, the loan amounts are typically smaller because there's no property used as security.
- Credit cards: Another option for short-term borrowing, which is ideal for smaller amounts of money. It's crucial to pay off the balance in full to avoid debt, particularly since credit cards often come with higher interest rates.
Summary
In summary, borrowing money against your home can be a good solution. However, it's crucial to weigh the benefits against the risks and consider alternative options before making a decision. By understanding how borrowing against your home works, you can make a well-informed choice that best suits your needs.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
