Home Equity Loan Companies UK – How to Get Credit
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UK residents have access to some – but not lots – of home equity loan companies offering equity loans and HELOCs. We discuss these products in detail before revealing some of the places to look when searching for these products.
If you want to know more about leveraging your home equity or just want to know which companies offer equity loans, you’re in the right place!
What is home equity?
Home equity is the value of your home you own. It is worked out by subtracting any existing lien of credit, usually just a single mortgage balance, away from the home’s value. It is essential that you use the current market value of your home rather than what you paid for it. Property valuations can fluctuate significantly over time or after renovations.
For example, if you bought a £200,000 property that has held its value, and you currently owe on the mortgage £130,000, then you have £70,000 home equity. Often home equity is also expressed as a percentage. Sticking with the same example, this homeowner would have 35% home equity.
Home equity will increase as the homeowner continues to make monthly payments on their mortgage. The equity in your home can also go up or down if the property value increases or decreases, respectively.
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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.
What’s the difference between a home equity loan and HELOC?
A variation of a home equity loan is a home equity line of credit (HELOC). A home equity line of credit is different because it doesn’t provide you with a lump sum. The homeowner receives a line of credit that can be accessed like you would access credit from a credit card – but based on the equity in your home.
The line of credit remains available over a draw period that can last many years. During the draw period, you typically only pay the interest on the credit, and after the draw period, you start making more substantial repayments covering both the loan amount and the interest.
Another key difference between home equity loans and equity lines of credit is found in the interest rate. Whereas home equity loans usually come with a fixed interest rate, a home equity line of credit will have variable interest rates that fluctuate over the draw period and further repayments.
How much can I borrow?
The amount you can borrow with a home equity loan or an equity line of credit is based on a loan to value ratio with a maximum of 80%. The maximum loan available is determined by the value of the asset used as collateral. Remember that the asset is not your home exactly, but rather, the home’s equity.
So, if you have £100,000 equity you might be able to borrow as much as £80,000. However, the period of time needed to repay (loan term), as well as your income and credit score could reduce how much you can borrow.
What term can I spread my repayments over?
Home equity loans and home equity lines of credit are offered with similar repayment periods. You can expect a loan term anywhere from 5 to 25 years, subject to your ability to repay within that repayment period.
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.
- The bank of mum and dad
Last but not least, the bank of mum and dad is alive and kicking – or even the bank of gran and grandad. Many elderly people in a secure financial position use some of their equity to help younger family members through education or to buy a property themselves.
The pros and cons of a home equity loan
The pros and cons of a home equity loan may be somewhat different for different people. But the generic benefits and drawbacks of using a home equity loan are:
- 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.
- 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.
Where can you get a home equity loan?
You can get a home equity loan or HELOC from banks, building societies and financial institutions operating online only. Although they are harder to find than looking for an unsecured loan or standard banking product. Some of the biggest UK banks don’t offer them at all.
Whenever you search for credit, only entertain options from legitimate lenders that are authorised and regulated by the Financial Conduct Authority.
We have compiled a selection of companies that offer home equity loans. These are listed as examples of where to find them only and are not necessarily the best home equity loan options. You should search the whole market or engage with a professional to do it for you.
Remember that the interest rate advertised may not be what you’re offered even if approved. Your credit history and income will determine how much interest you are charged.
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.
What is a good home equity loan rate?
Home equity loans are advertised with a representative example interest rate. This is the rate of interest at least 51% of applicants were offered after applying. You could be offered a lower or higher interest rate based on your finances and credit score. Thus, the best home equity loan for one person may not be the best for another. It all depends on the degree to which lenders view you as a risk or not.
Nevertheless, some recent research that is subject to change states that home equity loans and HELOCs have an average interest rate between 2% and 9.9%. The lower your credit score and the shorter the repayment period the more likely you will get a rate at the lower end of that spectrum.
What is the downside of a home equity loan?
A home equity loan puts your home at risk and this is what most people worry about when taking out these loans. But there is another downside to these loans that should be noted. To end the agreement and complete the administration required, you usually have to pay closing costs.
Sometimes lenders do not make you pay these to attract more homeowners but they make up for it by increasing the interest rate.
Closing costs can range from around 2-5% of the total amount of the loan. For example, if you took out an equity loan of £10,000, you might need to pay between £200 and £500+. Charges are much more significant for larger loans. Someone with a £100,000 equity loan may need to pay around £5,000 extra.
Consider these additional fees when comparing home equity loans and other loan types. The interest rate is not the only thing to think about.
What is the minimum credit score needed for a home equity loan?
There is no fixed minimum score you need on your credit history to secure a home equity loan or HELOC. The decision to approve or reject your application will take into account your credit score, but it is not the only factor within the decision. For this reason, there is no absolute minimum score required. Some people may get approved with a worse score than someone with a slightly better score.
However, to access the best interest rates you will require at least a good credit score, preferably an excellent score.
What is the pitfall of using home equity?
One pitfall of using a home equity loan is taking more equity than you actually need. This is the equivalent of borrowing money that you have no reason to spend and paying interest on it.
The other pitfall is not budgeting to pay back what you owe as agreed. This can result in foreclosure.
Is it worth getting a home equity loan?
Whether a home equity loan is worth it for you is impossible to say without knowing all about your finances, credit score and alternative options.
Only by looking at the whole picture will you know if these loans can benefit you, which is why it’s recommended to speak with free money advice groups like Money Helper and Citizens Advice or get professional financial advice from a commercial company.
Equity loans help scores of families the length and breadth of the UK each year for a multitude of purposes. They come with some risk, but using them correctly offers a lot of credit at a smaller cost for many.
Alternative options to a HELOC or equity loan
If you do not wish to get a HELOC or equity loan but still need credit, you may want to consider one of the following alternatives that also utilise home equity:
- Remortgaging/ cash-out refinance – you can get a new mortgage to cover the cost of paying off your first mortgage (keep in mind any early repayment fees) and then an extra amount within your equity for other purposes.
- Homeowner loans – these can be unsecured or secured loans to help with home renovations. The secured options can sometimes be secured against a car instead of your house, depending on how much you want to borrow.
- Lifetime/Reverse mortgages – a mortgage that pays you a high amount of equity and is only repaid when you sell the home to go into aged care or from your estate when you die. You may be able to make loan payments to mitigate the effects on your estate, but it is not necessary for you to pay back whilst still alive.
And you can also explore unsecured options, such as unsecured loans, debt consolidation loans and credit cards.
More guidance for homeowners at MoneyNerd!
Homeowners looking to release equity or make the most of their equity for various reasons can learn more about the process, benefits and potential pitfalls here at MoneyNerd. We’ve just released a whole new batch of articles and guides discussing different FAQs to do with these loans.
Type your question into our website and discover if we’ve just covered it!