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Can You Get a Home Equity Loan with No Mortgage?

No Mortgage Home Equity

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Can you get a home equity loan with no mortgage? The short answer is yes – but things are not that simple and there are important decisions to be made. We’ve written this guide to answer the common questions regarding a home equity loan on a paid-off house. 

Read on to learn all about these loans after paying off your home! 

What is home equity?

Home equity is the difference between the value of your property in today’s housing market and the remaining debt on your mortgage. For example, if your home is worth £250,000 and you have £150,000 left to pay on your mortgage, you have £100,000 equity in your home (£250,000 – £150,000). 

It’s important to note that you use the current market value of the property to make this calculation, rather than the value of your home when you bought it. If your home’s value increased or decreased after purchasing the house, then the equity in the home will not be the same as how much capital you have repaid through mortgage payments. 

Thus, you can increase your home equity by making mortgage payments and overpayments, but you can also increase home equity by increasing the value of the property through renovations etc. Sometimes the value will be increased or decreased by factors outside your control, such as developments to your neighbourhood.  

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What are home equity loans?

Home equity loans are a type of secured loan that uses the equity in your home as collateral. You can receive a loan balance of up to the same amount of equity in your home, although most lenders will agree to less. If you have £100,000 of home equity, you might be able to access up to this amount in a home equity loan. Lenders use your home to value ratio to determine how much they are willing to lend. 

A home equity loan typically has a fixed rate of interest, whereas a home equity line of credit (HELOC) uses a variable interest rate. If you choose a home equity line of credit, you do not receive the money as a lump sum. Instead, the lender provides you with credit similar to the credit you access through a credit card. You can choose when and how much of the credit you need at different times. 

Is there an appraisal with a home equity loan?

Because the amount of equity you have in a home is determined by the current property value rather than the value at the time of purchase, there needs to be a home appraisal. This is when your property and land is valued. An appraisal protects the lender, but it also protects the homeowner when taking out a home equity loan. It stops them from borrowing more than the equity that they really have.  

Do I qualify for a home equity loan?

To qualify for a home equity loan you will need to have equity in your home and meet a lender’s additional criteria. The additional criteria will be determined by each lender and could be subject to age, residency, credit score and income. 

To fully understand if you have equity and how much, you’ll need to know the current value of your property.

Can you have a home equity loan without a mortgage?

If you have paid off your mortgage balance and own your home outright, you should be able to access a home equity loan or HELOC. However, your application for a HELOC or home equity loan on a paid-off house will still be subject to checks and meeting lender criteria. 

Homeowners choose to do this so they can access funds for various reasons, not limited to:

  1. Debt consolidation
  2. Home improvements and renovations
  3. Medical emergencies
  4. Big ticket purchases
  5. Pay for education
  6. Helping out family members

Debt consolidation is one of the most common reasons people choose to release equity in their home. They use the lump sum to pay off other debts, such as personal loans and credit cards. They then only have to make single monthly repayments instead of paying back multiple creditors. But the main driver to do this is that the interest rate of the home equity loan is usually cheaper than what they’re paying on unsecured debts. 

If you have no mortgage because you do not own a home, then you cannot get a home equity loan or HELOC because you have no home equity. 

Can I remortgage if I have no mortgage?

You can get a new mortgage on your home if you have no existing mortgage because you already paid it off and own the property outright. This is known as cash-out refinancing and can be completed to the full market value for the home, or in some cases, even above this valuation to access more cash. Refinancing mortgages typically have lower interest rates, but not exclusively.

You should seek mortgage advice if you are considering this option. 

Can you lose your house with a home equity loan?

It is possible to lose your house if you do not keep up with home equity loan or HELOC repayments. The lender may initiate foreclosure, which is a term used to describe a process where the lender recovers the money owed by forcing you to sell an asset used as collateral within the agreement – in this case, your house. 

However, many lenders try to work with you to avoid this. They may adjust the loan terms to make repayments more affordable, meaning you keep your home but repay for longer. 

If you are struggling to meet monthly payments on your original mortgage or a home equity loan, it’s important to start a conversation with the lender. 

More home equity loans information! 

For more information on home equity loans and the key considerations, search your home equity questions on MoneyNerd. We’ve just published an array of articles and guides on this topic to help you understand what they’re all about.

Also, make the most of free advice from Step Change, Citizens Advice and similar groups!