What are home equity loans?
home equity loan uk
What are home equity loans?
Home equity loans enable you to borrow money against the value or 'equity' in your home. Here, we explore how they work.
The equity in your home
The equity in your home is the difference between the saleable value of the property and the borrowing you have against it. For example, if your home is currently valued at £150,000 and you have £50,000 outstanding on your mortgage, the equity in your home would be £100,000. If you had paid off your mortgage in full, the equity would be £150,000.
Home equity loans enable you to raise money against this value in your home. People will take out a home equity loan because it enables them to raise money without having to sell their home, often helping them to consolidate debts, pay off credit cards or buy a car for example.
A home equity loan is a secured loan – lenders loan you the money secured against the value of your home. They are sometimes referred to as homeowner loans. An alternative to home equity loans is home mortgage refinancing. This is where you typically increase your mortgage, taking some or all of the extra borrowing in cash.
What is a home equity loan?
A home equity loan allows applicable homeowners to tap into their home equity. They can access a lump sum loan based on the amount of equity they have, which is then repaid with interest over a repayment period beginning straight away.
The money borrowed is secured against the equity in the home as collateral. If you do not keep up with your monthly payment the lender can force you to sell your home in a process known as foreclosure. Losing your home is a genuine risk if you subsequently cannot afford to repay the loan.
Why get a home equity loan?
Home equity lenders do not put restrictions on what you spend their credit on, but they may ask you within an application process. Here are some of the common reasons people use them:
Home renovations
Home renovations are a common reason to want one of these loans. Many people choose to use their equity to help fund a new kitchen, loft conversion, home extension and many other projects. A home equity line of credit may be even more beneficial here as it can help you budget for different stages of the project.
The added benefit of using the funds for this purpose is that it can increase the value of your home and maybe even increase your home equity in the process.
Debt consolidation
Home equity loans can and are used for debt consolidation purposes.
Consolidating debts is when you have multiple debts and take out new credit to pay all the existing creditors off. You don’t end up with less debt instantly, but you manage to merge your debt into one more manageable place. Thus, you use the equity loan to pay off all other debts, such as personal loans and credit cards. It can be achieved through remortgaging as well.
It’s only worthwhile if the new credit has a lower interest rate compared with the interest rates payable on the existing debts.
Second mortgage
You can even use home equity loans and HELOCs to raise money as a downpayment on another mortgage to buy a second property. You will need to have repaid a large portion of the original mortgage and have a good credit report for this to be possible.
Similarly, you could use one of these loans to pay off your first mortgage, which would be beneficial if it has a lower rate of interest compared to the mortgage. Always be aware of added fees when comparing options.
Big-ticket purchases
The loan amount can be used to buy big-ticket items. One of the most common is a new car or to fund a once-in-a-lifetime holiday. Others have used the money to pay for a wedding or to invest in a new business.
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The benefits
Lower interest rates – you can generally get a lower interest rate through an equity loan than unsecured personal loans because you are listing collateral within the agreement. However, this may not always be true for those with an exceptional credit score.
Access more money – as the loan is based largely on your home equity, allowing homeowners to take out bigger credit than they would be able to get from other methods.
Many home equity loan companies – there are lots of companies offering equity loans to choose from. Applications are quick and can be made online with a swift result.
The drawbacks
Risk of losing your home – if you do not repay the loan as agreed then there is a real possibility you could be forced to sell your home to give back the money and interest. Loan lenders don’t take this option straight away and are likely to try and adjust repayments first.
Additional fees – there may be additional fees and charges to pay within the agreement that you wouldn’t have to pay within other credit agreements. You might have to contribute a fee to get a valuation of your home and even more likely, you will have to pay closing costs. We discuss these costs later in this guide.
Home equity loan companies
Bank home equity loans
When searching for home equity loan companies, banks are probably one of the first places you think to look. Many UK banks do offer these products, but it is more common to find HELOCs rather than home equity loans with your high-street bank.
Barclays Bank currently advertises home equity loans, whereas Santander and others are advertising HELOCs. Some banks stay away from these products. For example, HSBC currently does not offer any loans or mortgages that enable equity release – subject to change. And many others focus on lifetime mortgages only (explained at the end of our guide).
Online home equity loans
Online home equity loans are found with online lenders, including companies marketing themselves as an online bank. By searching your options online you can come across many companies, some of which you may have never heard of before. Make sure you only apply to UK lenders as the search engine can throw up many results from the USA as well.
Building society home equity loans
Fewer building societies offer these loans, but you may be able to get them from the bigger and well-known building societies. But again, even these companies typically focus on releasing equity in later life rather than simple equity loans and HELOCs.
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