Homeowner loans and second mortgages: What’s the difference?

What is a homeowner loan?

A homeowner loan examines the value of your property when applying for a loan. This is why they're also referred to as a ‘home equity' loan. 

Homeowner loans are a type of secured loan that puts the property as collateral for the lender. When applying for a secured homeowner loan, lenders will look at your credit score but tend to be more willing to lend to those with poor credit scores, because they have the property as security. Although this may be attractive, it means that if you fail to make the monthly payments then they have the ability to repossess your house.

What is a second mortgage?

When buying a home, most people will take out a mortgage in order to pay for it. A mortgage is a secured loan that is paid over a long period of time in relatively small installments. The house again is used as collateral and can be taken by the bank if you fail to meet these payments. A second mortgage is essentially the same except that it takes second place to your first mortgage (which has priority of payment). You can only get a second mortgage if you have home equity, in other words if you own a percentage of the property outright, and it's not fully under mortgage. This means if you have bad credit, you can still get a second mortgage but the interest rates may be higher.

Homeowner loan or second mortgage?

• Second mortgages are useful if you are struggling with unsecured loans, such as a personal loan.
• However, a secured loan is a more immediate payment and is good for those who don't mind taking a risk on the repayments.

When would I need a second mortgage?

There are a variety of reasons why you might feel a second mortgage is the right choice for you:

• If your credit rating has fallen since you took out your initial mortgage, a second mortgage allows you to avoid paying more interest on your entire mortgage, which would happen if you tried to remortgage.
• It's also useful if your mortgage has a high early repayment charge , making it overall cheaper for you.
• Second mortgages are a good tool to use for general financing needs when you do not need to fully remortgage. If you are self-employed, it may be hard to get credit so a second mortgage can be easier as you can use equity as collateral.

When wouldn’t I need a second mortgage?

As with any loan, borrowing a large sum of money is risky and has consequences if you fail to make the monthly repayments on time:

• If you are only just managing to pay your initial mortgage, there is a stronger chance you could lose your home if you can't pay either your first or second mortgage repayments.
• If you are using the second mortgage to pay off unsecured debts, such as credit cards, you will most likely end up paying more interest in the long run. In changing your debt from unsecured to secured, you are putting your assets (your house) at risk as well.
• Loan applications may affect your credit score. The best way to compare is to run a soft search, where you will be given a list of loans available.
  Use as much of your own money as possible. As a general rule of thumb, the less money you borrow the better.

What happens if I move house?

hether you have a homeowner loan or a second mortgage you will have the same options when it comes to moving home. You can either transfer the loan to a new property, which is more straightforward but runs the risk of an increase interest payments. Or, you can pay off the loan through the sale of the house or borrowing more.