As the name suggests a homeowner loan is a loan to a homeowner. Usually using equity in the home to secure the loan, which often gets a more reasonable rate of interest than other types of loans.  Nothing surprising there, although the dropping value of homes in the UK has caused these loans to become more expensive and harder to find. Many major banks no longer offer them and Barclays, for instance, now farms them out to a finance house and takes a commission, which adds to the cost of the loans. The finance house will also take a commission or fee.

They are invariably more expensive than mortgages, although the terms are often similar – repayment periods of up to twenty-five years have been common in the past. With 75,000 homes facing foreclosure in the UK this year, the homeowner loan is somewhat akin to the Polar bear. Nearly, but not quite extinct and half of the population believe it is all a lie spread by malcontents to prevent the free world from progressing.

In the UK, the usual excuse for a homeowner loan was for some sort of improvement to the house. Whether this actually added to the resale value is besides the point as most people taking a loan of this type would then spend it on a boat or a car or luxury cruise or something - and none of the banks have ever been known to come ‘round and make sure you added that new bathroom suite.

Property values fell somewhere in the region of 25% in the UK during 2008, so it is fair to say many are not eligible for this type of loan – seeing as they already owe more than the property is worth. Until such times as the housing market stabilizes the homeowner loans are going to stay rare. When the market finishes correcting itself is anyone’s guess, but there are estimates that as many as two million households in a “negative equity,” situation already. My personal feeling is this will have grown substantially by the end of the correction. Negative equity (UK) and underwater mortgage (USA) are nice euphemisms for “owing more than your house is worth.”

Under normal circumstances, this really makes no difference, but issues arise for people who need to move house quickly, cannot meet repayments or were planning on using their home as an ATM – as seems to have been the norm over the last ten years or so.