Are secured loans for homeowners still available?

11 May2009

In a word: yes. Secured loans are still very much available for homeowners - but that doesn`t mean every homeowner will be able to find one. If you`re looking for a secured loan, start by asking yourself these three questions...

Do I have enough equity for a secured loan?*

Secured loans are secured against property. To be exact, they`re secured against the equity in a property - the amount of that property`s value that doesn`t already have a debt (a mortgage or another secured loan) secured against it. You can think of this as the loan provider`s `safety net`, as it proves that the homeowner has enough assets to repay the secured loan if they don`t keep up with repayments.

When house prices are rising, this is rarely a problem: in January 2003 (according to the Nationwide House Price Index), the average house was worth a staggering 26.5% more than it had been just 12 months earlier. Someone who`d bought a 100,000 house in January 2002 could have found themselves with almost 30,000 of equity just one year later, even if they`d bought it with a 100% mortgage!

When house prices are falling, it`s a different matter, for two reasons:

1) The house that was worth 180,000 a year ago could be worth 150,000 today. Unless the homeowner had at least 30,000 of equity a year ago, they`ll be in negative equity now - they`ll owe more than the house is worth, so there`s simply no equity to secure a loan against.

2) Worse still, the value of that house might drop further, so it`s worth 120,000 in a year`s time (depending on what happens to the housing market). Lenders need to protect themselves, so they might not be willing to let someone secure a loan on equity that might disappear if house prices keep dropping. These days, they tend to offer secured loans to homeowners who have at least 20-30% of equity.

Is my credit rating good enough?

Your credit rating will matter, even though your loan is secured against your property: lenders will want to know how well you`ve repaid debts in the past.

If you`re worried about problems on your credit report, a specialist provider may be able to help you find a secured loan.

Can I afford the repayments?

Again, simply having the equity isn`t enough to get a secured loan: if you can`t show your lender - and yourself - that you can afford the monthly repayments, then a secured loan probably isn`t right for you.

*This isn`t necessarily the most important question when you`re looking for a secured loan - but it is the one that needs the longest section explaining it!

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