What is a HELOC (Home Equity Line of Credit)?
A HELOC is a type of secured home equity loan that uses some of your home equity as collateral within a loan credit agreement.
They can be taken out against your residential property or sometimes against investment properties and holiday homes.
How does a HELOC work?
A HELOC works by providing you with an approved loan amount based on your home equity and repayment affordability.
You can receive some of this loan initially and then access the rest of the loan through instalments of your choosing.
You can take some of the loan as needed over the period, which may last up to a decade. This period is known as the draw period. You’re not forced to draw all of your approved loan if you don’t need all of the money.
How you pay back a HELOC
HELOC repayments are split into two distinct repayment periods.
The first repayment period occurs during the draw period. During this time, you make only interest payments on the amount of money you have drawn – not the total loan amount approved. The interest is repaid through monthly payments.
The second repayment period occurs after the draw period, whereby both the principal loan drawn and interest are repaid through monthly repayments. This repayment period is for a fixed duration but can include a final larger payment – i.e. a balloon payment – to clear the loan.
How much can you borrow?
Most HELOC providers will allow you to borrow a total loan equal to around 80% of your property value minus the amount you owe against the property – in a best-case scenario!
To work out how much you can borrow, you might wish to use a HELOC UK calculator. Alternatively, you can do some quick maths to get a general idea of HELOC borrowing power.
First, you need to work out your available home equity. This is done by working out the current market value of your home and then subtracting all debts secured by the property.
For example, if you own a £150,000 property and have a £100,000 mortgage loan, you have 33.33% equity which is equal to £50,000.
In a best-case scenario, most HELOC lenders will allow you to borrow a loan equal to the value of 80% of your home equity. So if you had £50,000 equity, you might be able to borrow up to £40,000 in the best scenario.
Other factors can influence how much you can borrow with a HELOC.
HELOC deals for all purposes
- Stuck paying high interest on credit card debts & loans?
- Looking to fund a home improvement project?
- Dreaming of finally taking the once-in-a-lifetime trip?
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What is the difference between a home equity loan and a home equity line of credit?
A HELOC is a variation of a home equity loan. The main difference is that a home equity loan provides the loan as a lump sum, which is immediately repaid plus interest each month until the loan is cleared.
Thus, the way you receive the loan and the way you repay are different. There can be pros and cons to both types of secured loans.
Are HELOCs available in the UK?
Yes, HELOCs are relatively new additions to the secured loan industry in the UK.
Although HELOCs have been widely used elsewhere, including in North America, they are only just emerging as a type of loan in the UK.
How do I get a HELOC?
To get a HELOC you need to find a UK HELOC provider and then make an application. The lender might need to revalue your property so they can accurately calculate your home equity and how much they are willing to lend. An application can take weeks to get approved and finalised.
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Can you get a HELOC with any bank?
No, some banks don’t offer HELOCs, especially with these types of secured loans being relatively new to the UK.
You might find some banks willing to offer you a HELOC, otherwise, you may need to look at alternative HELOC lenders.
How do I qualify for HELOC?
To qualify for a HELOC you will need to:
- Have sufficient home equity in the property you wish to borrow against
- Be able to afford projected repayments, as calculated by the lender
- Have an acceptable credit score as decided by the HELCO company
What is the minimum credit score for a HELOC?
There is no minimum credit score required to get approved for a HELOC with all lenders. Your credit score differs between credit reference agencies because they can use different scaling systems, and each lender can apply its own acceptable credit rating criteria.
However, some sources suggest you’ll need at least an average credit score to get a HELOC. Others indicate there are HELOCs for people with bad credit.
Can you get a HELOC with high debt?
You might be able to get approved for a HELOC with a high amount of existing debt.
If you have a lot of debt on your property, you can still get a HELOC if you have sufficient home equity and can meet monthly payments.
The lender will complete an assessment of your debt-to-income ratio to work out what repayments are affordable to you, which could limit the amount you’re able to borrow through a HELOC.
What is a HELOC good for?
A HELOC can be used for lots of different reasons, such as:
- Home improvements
- Paying for private school fees or university tuition
- Paying for private medical care
- Helping to find big-ticket purchases, such as a new car or further (property) investments
Can a HELOC be used to consolidate debt?
Yes, a HELOC is sometimes used to help consolidate existing debts, such as to consolidate credit card debt, personal loans, account arrears or a combination of different debts.
Using a HELOC for debt consolidation works by getting approved for an amount of money you need to pay off multiple other debts, and any other fees that may come from doing this, such as early repayment charges.
Is it wise to use a HELOC to pay off debt?
Using a HELOC can be a sensible way to pay off existing debts and save money in the process.
Debt consolidation with a HELOC merges some of your debts into one new debt secured against your home.
It’s worth doing so to make monthly repayments easier to manage, but more so if you can pay less interest. You’ll save money if the HELOC interest rate is lower than the cumulative interest rate payable on existing debts.
What are the advantages of a HELOC?
The pros of using a HELOC are generally:
- You can access a sizable loan based on home equity, which is often more than what’s available through unsecured loans.
- You could get a competitive interest rate, considering the loan is secured by your property.
- You only pay interest on the amount you draw during the draw period, rather than the whole loan that you may not spend straight away
- They’re ideal if you know you need a loan but aren’t 100% sure how much you need
- A HELOC may not stop you from becoming ineligible for some means-tested benefits
What are the disadvantages of a HELOC?
The cons of using a HELOC are generally:
- The loan is secured against your property and this puts the property at risk
- Variable interest rates could increase in the future
- You might need to draw a minimum amount during the draw period
- A longer and more complicated application process in comparison to personal loans and credit cards
- There are fees to set up and end the loan (closing costs) you need to be aware of
Does a HELOC have a fixed interest rate?
No, a home equity line of credit usually has a variable interest rate with discretionary changes as directed by the HELOC provider.
How do rising mortgage rates affect HELOCs?
Rising mortgage rates don’t affect the interest rates applied to HELOCs, but what increases mortgage rates is the same as what causes an increase in HELOC interest rates.
Interest rates are largely dependent on the Bank of England’s (BoE) base rate, which is influenced by the economy and the rate of inflation. Increases to the base rate of interest is likely to increase the interest rate offered as part of a HELOC by lenders – and vice versa.
What is a good HELOC rate?
Good HELOC interest rates are time-sensitive. What might be a good rate at the time of publication may not be a good rate in the future.
You can learn more about this in our HELOC rates in the UK guide.
Is HELOC interest tax deductible?
Interest applied to home equity loans and variations of home equity loans aren’t tax deductible in the UK.
Is it worth getting a HELOC?
It can be worth getting a home equity line of credit if you require credit and have sufficient home equity.
Homeowners’ situations are unlikely to be exactly the same, so you may want to get professional advice before making a decision.
Does a home equity line hurt your credit?
A home equity line of credit has the potential to decrease and increase your credit score, depending on how you manage your HELOC repayments.
Applying and taking out a HELOC can cause a slight dip in your score, but your score is improved if you manage to make HELOC repayments in full and on time. This is because you prove you can manage your money and debt effectively.
However, if you miss payments or pay late, you can cause significant damage to your credit report, making it harder to get another loan in the future.
Is there a better option than a HELOC?
A HELOC is just one borrowing option and not the only secured loan you can consider. We discuss some other ways to use secured loans to borrow money below, which might be better than a HELOC for your needs.
You can learn more about an array of secured loans on our dedicated secured lending hub.
Home equity loans
Home equity loans are another type of second mortgage that can be added to your home. A standard home equity loan is similar to a HELOC but is considered less complicated by providing a lump sum and a fixed repayment period. Home equity loans might have fixed interest payments, which could appeal to some people.
Remortgaging
You might not need to apply another line of credit against your home at all. If you have an existing mortgage, you could instead remortgage and ask to borrow more from the mortgage provider to release a lump sum.
Unsecured lending
If you’re not needing a significant amount of credit, you could consider a personal loan instead of a HELOC. There are benefits and disadvantages to using unsecured credit rather than a HELOC, which we’ve covered in detail here.
