Discover how to borrow against property owned by you to secure more funds or use existing home equity to pay towards home improvements.
What ways are there to borrow against my home?
There are three main ways to borrow against your home:
- A secured loan – This is a loan secured against an asset’s value. This asset is used as collateral if you can’t repay the loan.
- A further advance – This is when you take on more borrowing from your current mortgage lender, typically at a different rate from your main mortgage.
- Remortgaging – You can borrow more money by remortgaging your home. Be sure to check that the application fees of remortgaging and any early repayment charges don’t leave you out of pocket.
All three loan types require that you use your home as collateral and guarantee your loan will be repaid on time and in full. If you’re unable to make repayments, you could lose your home.
What affects the amount I can borrow against my house?
The amount you can borrow against your home is determined by the following factors:
- Value of the property
- The equity in your property
- Credit history
- Affordability
- LTV ratio
What is house equity?
House equity is simply how much of your home is yours outright. To calculate your house equity, subtract the amount you have left to pay on your mortgage from the current market value of your home.
Example:
Home value: £200,000
-
Mortgage left to pay: £110,000
=
Home equity: £90,000
If you have paid off your mortgage in full, then your home equity will be 100% (in the above example, £200,000). To find out how much of your mortgage you’ve paid off, check any recent mortgage statements or call your lender.
If you have any secured loans, add the total of these to the amount you need to repay on your mortgage.
Example:
Home value: £200,000
-
Mortgage left to pay: £110,000
+
Secured loans: £20,000
=
Home equity: £70,000
What is the LTV ratio?
Another important factor which affects how much you can borrow against your home is the loan to value (LTV) ratio. The LTV ratio is displayed as a percentage and calculated by dividing the amount borrowed on your mortgage with the valuation of your property and then multiply by 100 to get a percentage. A mortgage lender will lend up to a certain LTV % dependant on their lending criteria.
The maximum LTV ratio allowable by a lender can also be impacted by your creditworthiness or credit score and is a representation of the size of loan available in relation to the value of your home or your home equity.
To find the amount you can borrow against your home, lenders use the LTV ratio as a crucial factor to assess the terms of your loan. The higher the LTV, the greater the risk to the lender. If you can’t make repayments on-time, the lender will be less likely to recover lost funds.
How to calculate the LTV ratio
Now that you know how to calculate your home equity and LTV ratio, you can figure out your own LTV ratio by dividing the amount you wish to borrow plus any existing mortgage with the current value of your property and multiplying it by 100.
For example, if you wish to borrow £150,000 in total and the value of your property is £250,000, your LTV would be 60%.
An LTV above 80% is considered high for the lender. This will mean higher interest payments, so an LTV ratio under 80% should result in a better deal.
What are the advantages of borrowing against owned property?
The main advantage of borrowing against property owned is that you’re often able to borrow more than you would with an unsecured loan. This is because the lender can use your property as security which makes the loan lower risk for lenders. If you’re unable to keep up with the loan repayments, your home can be repossessed and resold by the lender to recover the debt owed.
Another advantage of borrowing money against your house is that it can increase your chances of being accepted for a loan if your credit score is poor. Using your home as collateral could increase the likelihood of lenders approving you for a secured loan.
However, poor credit rating can affect the interest rates if you’re accepted for a secured loan as it shows you are a higher-risk borrower. The good news is that regular repayments of your secured loan will see your credit score increase.
What are the alternatives to borrowing against your home?
A secured loan against your home is not the only option if you are looking to borrow. You may consider:
- Unsecured home improvement loans – This can be a great way to renovate your property and add value. If you choose not to take out a secured loan, an unsecured home improvement loan is the best option to borrow. However, be aware that interest rates may be higher on an unsecured loan and there are still risks of debt collection by other means if you do not repay.
- Social loans – With a social loan, also called peer-to-peer lending, you can lend directly from other people online. As this form of borrowing does not involve a bank, you may find that an individual investor is more willing to lend to you.
- Credit cards – Getting a credit card is a common method of borrowing. However, your eligibility for acceptance still depends on your credit score. Providing you can make the repayments for your credit card, your credit score will increase.
Costs to consider when borrowing against your home
Borrowing against your home will usually require your home to be valued so the lender can confirm that it provides adequate security for your loan. Doing this ensures the lender that they would be able to recoup the loan amount if you default on the loan.
You may also be required to have an insured home to be accepted by lenders. This is the case if your LTV is high. Insurance offers both you and the lender protection in the event of damage being caused to your home.
How can I find a secured loan?
With so many variables, it can be hard to find a secured loan with a low interest rate that will keep borrowing costs to a minimum. Use our loan and mortgage calculator to see what options are best for you.
For more hints and tips on loans, visit Norton Finance Know How.
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