Every home has a certain value in the market that people use to their advantage by taking loan against it. In financial terms, the difference between the market value of your home and the claims held against it by the lenders is called Equity. Suppose, you have a home that is valued at £200,000 and you do not have any debts secured against it. It means that the entire equity in your home is free and you can use it for raising loan.


There is a limit that lenders observe when lending you money against home equity. It is called loan to value ratio. Normally, this ratio is 80 per cent, but in case of bad credit rating and other adverse circumstances the loan to value ratio can be less than that.


Many people who are rich in property but poor in cash take secured homeowner loans to alleviate their financial crunch. Millions of pensioners in the UK are surviving on inadequate retirement incomes but living in homes that have high market values. Many of these people take secured homeowner loans. However, there is a negative side also that should be taken care of or else such people could end up losing their homes. An unpaid secured debt may lead to repossession of your home by the lender.


‘Home equity release’ schemes


Many lenders provide money against the value of your home, either in lump sum or as a regular monthly income. These ‘home equity release’ schemes are often marketed by their providers as a financial lifeline in old age. Pensioners and old age people fall for this type of borrowing, taking them as an ideal solution for their financial problems. The concern is that many of these schemes are unregulated, offering no compensation to buyers in the case of any mis-selling by the lender or financial adviser. It is vital that you make a right a right choice because your precious home is at stake in such type of loans.


There are two types of schemes available - lifetime mortgages and home reversion. The choice should depend on your individual circumstances and requirements. In case of lifetime mortgage, the homeowners avail secured loans on their property. It is very much like secured homeowner loans but here the interest charged is repaid with the capital when the homeowner dies, or is taken into care, and the house is sold. The best part is that these mortgages are regulated by the Financial Services Authority in the UK. The second type of plan is home reversion plan. They are technically sale and lease agreements and not loans. A part or all of your property is sold to a lender for lump sum cash while you retain the right to live there. On death, the sale of property reimburses the lender and leaves the rest for the legal heirs.


On the other hand, secured homeowner loans are to be repaid within a pre-determined time period. At the time of signing the loan agreement, both the parties agree to the loan term.