Can I borrow against my paid-up home?

While you are able to apply to borrow against your property, there are dangers in doing so.

If I have a home paid in full and in my name, can I borrow money against it? The reason I ask is that I have a big yard and need to put up one or two lock homes to get an income monthly from tenants renting from me. If I submit a plan to a bank and give my house as collateral will they be able to assist me? Please advise me regarding this matter. I currently don’t have any form of income. My house is the only plan I can make to generate an income.

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Thank you for your question. While you are able to apply to borrow against your property, bear in mind that the fact that you do not have a regular source of secure income may count against you. This is because any financial institution lending you money will want to be sure that you are able to repay the loan.

Should you put together a convincing business plan, applying for a secured loan may be an option for you. As you have noted in your question, a secured loan is one that is backed by an asset which, in your case, would be your property. Your financing institution would use your property as collateral in the event that you are unable to repay the loan. Essentially, you would be taking out a loan against the equity held in your property and, should you default on your loan repayments, the financing facility can retrieve what is owed to them by realising your property. Such a loan would be considered low risk because the financing institution can take ownership of your asset should you default and, as such, it is likely that you would qualify for this type of loan.

Many banks and online lenders provide secured loan facilities, and it is best to shop around and compare interest rates, requirements, and repayment terms. You may also want to consider approaching a bond originator when looking for a loan. A bond originator will submit home loan applications on your behalf, and often have great success in obtaining loan approvals and more favourable interest rates.

Having said that, it is important to be aware of the dangers of secured loans. These include:

  1. If you default on the loan repayments, your financing institution can take ownership of your property as collateral. However, if the collateral is insufficient to cover your debt, you will personally be liable for any outstanding balance. Depending on circumstances, the lender may realise your property for an amount lower than the market price as their primary interest is in recouping the loan.
  2. You stand a risk of losing your property and, while this may seem obvious, you may find yourself in a position where you and your family do not have a place to live.
  3. The terms of secured loans are often over a longer period of time, which means that you will incur more interest.

Much like any other kind of loan, the lender or financial institution granting a secured loan takes a calculated risk before deciding to grant the loan. Failure to meet your monthly repayment obligations may result in legal action being taken against you which, worst-case scenario, could result in your home being repossessed. As such, we recommend that you consider all alternatives before making a decision to borrow against what appears to be your only asset.

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Surely NCA will prevent such a loan? Bank lending is capped to a repayment of no more than 30% of your gross? Meaning without income, a bank is legally not allowed to lend to you?

If the rental income will adequately service the debt and fall within the NCA thresholds, the bank may look at lending.

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