Get The Real Facts about Homeowner Consolidation Loans!

Michelle Tuvey Michelle Tuvey | Loan Underwriter

If you are considering consolidating your high interest debts into a single, secured loan, make sure you have all of the information ahead of time. The more you know about homeowner consolidation loans, the better prepared you will be to compare loan products from different lenders. Moreover, make no mistake; it is very difficult to get the best possible deal without comparing.

image one

Homeowner consolidation loans are straightforward in terms of what they offer. The challenge is determining which lender is offering you the absolute best deal. Before you can figure that out however, there are some important things you need to know about how secured loans work.

Equity and LTV

A debt consolidation loan for home owner financing is based on the equity in the borrower's property. Assuming you own your own house, you have equity equal to the difference between the outstanding balance on your mortgage and the retail value of your property. An outstanding balance of £40,000 on a home worth £100,000 results in equity of £60,000. The equity in your home represents the maximum amount you shall be allowed to borrow. However, do not stop there.

Borrowers also have to consider what is known as the loan-to-value (LTV) ratio. This is a number that tells you how much of your equity you can borrow. Using our previous example of £60,000 in equity, a 100% LTV will allow you to borrow the full amount. A 75% LTV will allow you to borrow only £45,000. It is important to pay attention to both your equity and lender LTV ratios so that you are not caught off guard when you're offered a loan deal.

APR and Representative APR

The next thing you need to know is the difference between the standard annual percentage rate (APR) and representative APR. Your standard APR is the amount of interest you will pay on the outstanding balance of your loan every year. Representative APR is more than that. It is a combination of your annual interest rate and all of the associated costs of borrowing.

Why is this difference important? Because the representative APR is a more accurate measure of how much you will pay over the course of a secured loan. Nevertheless, understand that you are not guaranteed to get the representative APR advertised by a bank. The law only requires lenders to approve 51% of their applications on that advertised rate. The remaining 49% can be approved at a higher rate.

Your Equity as Collateral

As attractive and helpful as debt consolidation loans are, they are not without risk. Do not forget you are using the equity in your home as collateral against your borrowing. Should you be unable to make your monthly payments, your bank can repossess and sell your home to recover their money. Also, keep in mind that a debt consolidation loan is entered as a second charge on your property.

A second charge means the lender making the debt consolidation loan is second in line behind your primary mortgage holder. Should your house be sold, the primary mortgage holder is paid first. Whatever is left goes to the lender that made the consolidation loan. If there is not enough to cover your debt, you will be responsible for paying the balance out of pocket.

As long as you understand the risks and implications of debt consolidation, you should consider the option as a way of retiring high interest debt. Used properly, consolidation loans are a good way to gain control of your personal finances and budget. Used improperly, they can get you in severe trouble that is worse than what you are dealing with now.

The expert advisers at Secured Loan Expert can help you compare homeowner consolidation loans side-by-side and help you through the entire lender and loan selection process. Once the best loan deal has been found we will make the application on your behalf ensuring that all the paperwork is in order and that your case is presented to the lender in exactly the way they like it ensuring the best chance of a successful outcome. With our help you are sure to get the debt consolidation loan that is right for you.

Instantly compare 950+ of the UK's best secured loans

Rates from as low as 3.75%