Your Home as Collateral For Other Loans
An open door
When you become a home owner you immediately open up more doors for yourself in terms of being able to borrow money to make things happen. It might be a business idea or an investment opportunity, but buying into property can open more doors than you might think.
Big Business
Whether you’ve got a big idea or a modest dream of being self employed, if you need cash to help you start up in business then once you have a house behind you it can make all the difference.
It’s easy to think of owning a house as just an expense, but as security it can be useful against large sums of money. If you have bought the property in association with a partner then you must consult them before putting it up as security. The threat of losing the house by having it repossessed if you default on the loan is a very real one. It’s not advisable to play with the roof over your head.
Secured loan
Taking out a loan and using your house as security will usually indicate that the loan must be fairly substantial. Using your home as security on a debt must really be the last step after you have exhausted all other options. If you are in financial difficulties and want another loan to help you out of them then you may be on the downward debt spiral and using your house as security is not a wise move.
If, on the other hand you are considering using your house to consolidate your existing debt into a manageable lump, then you may be doing the right thing.
Debt consolidation
The biggest thing you must be aware of when using your house to consolidate your debt is that you must not relax and then go and build up debt once more on your credit cards, overdrafts or other loans. This is a common mistake and all it does is take you right back to square one where you now have debt consolidation loan repayments to pay on top of everything else as well.
- - interesting article on debt consolidation
Lifetime mortgages
A “Lifetime mortgage” is the new name for a product that was used to be called an Equity Release Plan. These were created in the nineteen eighties and came in for some bad press right from the start. They are usually used by the elderly to take advantage of some of the equity stored in their home. But the interest rates the customer is charged is usually several points above standard interest rates.
There are other dangers that should be thoroughly investigated before putting the property up for a Lifetime mortgage, including assessing exactly how much interest will actually accrue and how it is to be paid off at the end of the agreed term, but having said that, the cash lump sum that usually is released can really affect the quality of life of the customer.
It’s worth remembering that a Lifetime mortgage will reduce the amount left to beneficiaries and so it is wise to discuss this with them as well before making your final decision.
Further advance
It may be that you don’t want to take out an additional loan against your property as you want to minimise the number of loans you have running, if this is the case then you can take out what is called a further advance. This is effectively re-mortgaging with the inclusion of the additional sum. The benefit of this is that it is usually a low interest rate as it’s a mortgage, and as long as the figures are within the lender defined parameters you can borrow quite substantial sums.
Again, before committing to any borrowing, it must be carefully considered and you should investigate all possible alternative ways to borrow funds so that you settle on the one that is perfect for your own individual financial situation.
Borrowing against your property can be a useful way to obtain funds, but it can be risky too.
More Reading:
- For those with good credit, a mortgage in decent standing, and a relatively (depending on the bank's definition) sizeable difference between a home's worth and the balance of a mortgage, a home equity line of credit may be a good option for those needing a loan
