What are the interest rates on home equity loans in the UK? If you are considering an equity loan or a home equity line of credit (HELOC), you’ll be eager to know what the average interest rates are – and how much more affordable they are than personal loans. 

But that’s not the full story and there are factors that could mean a different credit option is the better deal. Read on as we dissect home equity loans, fees and their average rates of interest. 

What is home equity?

Home equity is the amount of money you have in your home, or the monetary value of your home that you own outright. You can calculate the amount of equity in your home by taking your existing mortgage balance away from the current home’s value. It’s essential that you use the property’s current value rather than what you bought it for.

For example, if your home is worth £300,000 in today’s market and you have a mortgage balance of £200,000, then you have £100,000 in home equity. And if the property’s location became more sought after and went up in value by £10,000, then the home equity would rise to £110,000 without any additional mortgage payments. Thus, a home’s equity can change by making mortgage payments or by changes in its valuation. 

What is a home equity loan?

A home equity loan will give you access to credit based on how much home equity you have. Lenders will typically allow you to borrow up to a maximum of 80% of the home equity in a lump sum, which can be a significant amount for people who have paid off a large percentage of their mortgage or own their home with no mortgage. You will then repay the loan with monthly payments over a fixed repayment period. These loans are usually offered with a fixed rate of interest. 

The loan is secured against the equity, which grants lenders more assurances and enables them to offer lower interest rates compared to unsecured personal loans. However, if you do not keep up with monthly payments, the lender could initiate foreclosure. This is when you are forced to sell your home. Losing your home due to a home equity loan gone wrong is a real possibility.

The lender will only grant up to 80% in most cases because the remaining 20% equity acts as a buffer in case the property is to decrease in value. This is to protect themselves but also to protect the homeowner from overborrowing and ending up with the dreaded negative equity in their home. 

How long do I get to repay a home equity loan?

Lenders will allow you to repay the money over the course of 15 years or longer. You can choose to repay quicker in as short as five years if affordable. Shortening your repayment term could help you access an interest rate discount, but nothing is guaranteed. 

Where can you get home equity loans?

You can get one of these loans from high-street banks, online banks, building societies and a vast number of online lenders. Once approved the money will be paid into a current, checking or savings account. They are widely available across the UK and you should explore your loan options extensively to avoid missing out on a better interest rate. 

Is there an appraisal for a home equity loan?

It’s almost certain that a home equity loan will require the lender to complete an appraisal. This is where a professional will look around the property and give it a current market valuation.

Lenders initiate this process because they need to know the current value to verify how much home equity you have and lend responsibly. It also protects the loan applicant because it prevents them from taking out more credit than their home is worth. 

You could be charged a fee to complete this process, but some lenders offer to pay this themselves. 

What can you use a home equity loan for?

A home equity loan can be used for an array of means, not limited to:

  1. Home improvement – this can be a smart idea because the right types of renovations can increase the value of the home and simultaneously increase the amount of equity you have.
  2. Debt consolidation – if you have existing debts elsewhere, you can release home equity and use the money to pay those debts off. Not only do you merge your debts together, but you can also capitalise on the lower interest rates of home equity loans and save money on your monthly payment. There are other methods of debt consolidating that we touch on towards the end of this guide. 
  3. Large purchases – they can be used to pay for big-ticket items like cars, expensive holidays or even university degrees.
  4. Helping family – some people choose to use them to access credit and give it to family members to help them get on the property ladder or for other means. The bank of mum and dad is real! 

There are rarely any limitations placed on what you can spend the money on. As long as you prove to the lender that you can afford the monthly payment and you have a decent credit score, that’s all that matters to them. 

The interest rate on home equity loans

One of the aspects of a home equity loan that many people like is its interest rate. Not only are the interest rates on these loans lower than most personal loans, they usually come with fixed monthly interest. With a fixed interest rate, you’ll always know exactly how much your monthly payment will be over the whole loan payment period. 

What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is similar to a home equity loan with some key differences. A home equity line of credit allows the homeowner to access credit based on the equity they have in their property with their home as collateral, but the money is not paid out in a lump sum. 

Instead, the credit is accessed over time at the homeowner’s discretion over a draw period, which can last many years. A HELOC is a revolving line of credit and works in ways much like a credit card, accessing a loan amount as and when needed. Only once the draw period ends does the homeowner start making a monthly payment to pay back the loan amount in full, including the principal and interest.  

The other key difference is found in the home equity line of credit interest rate…

The interest rate on a HELOC

Another key difference between a home equity loan and home equity lines of credit is the interest rate. Whereas the former is usually fixed, a home equity line of credit typically has a variable rate. You’ll pay variable interest over the whole repayment period, meaning your monthly payment can go up and down and you’ll never be 100% certain of what you’ll owe. 

What is the current interest rate on a home equity loan?

The current interest rates on home equity loans will vary between lenders and will also be based on your loan to value ratio, personal finances and credit score. However, based on the current market at the time of writing, you can usually find home equity loans with an interest rate between 2% and 9.9%. 

Rates are typically lower if your repayment loan term is shortened. For example, if you want to repay over five years you might be able to get a lower rate than if you wanted to repay over 15 years. 

The average interest rate on home equity loans

The average interest rate for a home equity loan at the time of writing and subject to change is between 5% and 6%. If the loan term is shorter, the interest falls at the lower end between these figures – and vice versa. 

Home equity loan interest rates vs personal loan rates

To put this into context, personal loan APR representative interest rates can vary between 2.9% and 50%+. 

Only those with the best credit score are able to access low-interest rates that can compete with a home equity loan. Others will pay substantially more interest with unsecured credit options like these, including credit cards. Moreover, personal loans do not allow you to access huge amounts of credit like a home equity loan would. 

That doesn’t mean you shouldn’t consider a personal loan. It may be a better option for you, especially when you consider closing costs (more on this later – don’t miss it!). 

What is the current interest rate on a home equity line of credit?

Again, it is difficult to determine a current interest rate on a home equity loan or line of credit because the rate offered will depend on multiple factors, and because HELOCs use a variable rate. However, at the time of writing and subject to change, a HELOC interest rate varies between 3% and 9%.

The average interest on a HELOC

Finding data on the average interest you pay on a HELOC is difficult and will change drastically based on loan amounts, repayment terms, variable rate – and for many other reasons. However, some research has found that the average HELOC rate paid over the course of all automatic payments is around 5.7%.

This is still lower than what many people can access through most unsecured loans. Some people with an excellent credit score might be able to get competitive rates to a HELOC or even better. 

What is the downside of a home equity loan?

Other than putting your home at risk, the other downside of a home equity loan is the closing costs. To finalise the loan and pay back everything owed, you’ll usually need to cover closing costs that can range from 2% to 5% of the total loan amount. For example, if you took out one of these loans for £30,000, you might have to pay from £600 to £1,500 in closing costs on average.

Even though these loans have a lower rate of interest than other options, the closing costs should be factored into any comparisons and your decision of how to access credit. If you are borrowing a large amount, these fees could wipe out any savings from lower interest.  

Is it a good time for a home equity loan?

At the time of writing in the third quarter of 2021, it is a good time to get a home equity loan as interest rates are comparatively low. However, you should not rush to get one of these loans. It takes time to assess your options and find the right lender for you, which may include getting a better deal. 

Can I get a home equity loan or HELOC with bad credit?

You may still be able to get one of these loans or lines of credit if you have a poor credit rating, but it will be much more difficult and fewer lenders may be open to giving you credit. You might not get the lower rates offered to those with a good credit score. Each application is assessed on its own merits and there is no way of saying what credit scores are accepted and which ones are rejected. 

Five Alternative options to a home equity loan

There are many other ways to access credit, which may or may not involve utilising your home’s equity. Here are five alternatives to a HELOC or equity loan:

  1. Personal loan

A secured or unsecured personal loan can be a good alternative. People with good or excellent credit scores may be able to get rates close to those offered through home equity credit. Secured loans may be able to match them closer due to the added securities involved. You may not be able to borrow as much, but you won’t be subject to potential additional charges, such as origination fees, lender appraisal costs and closing charges. 

  1. Credit card

A credit card is another unsecured option and you may be able to get a competitive rate with an excellent credit score. Some credit cards will come with a 0% rate for so many months, which can make these options attractive if you want to repay the amount in full quickly. Yet again, you won’t be able to get significant credit, which is possible with a home equity loan. 

  1. Home improvement loan

A home improvement loan comes in secured and unsecured forms. Some secured home improvement loans are similar to equity loans because they also use the home equity as collateral. If you were wanting to raise money for home renovations and redecorating, you may also want to investigate these loan types. 

  1. Remortgaging and cash-out refinance

Remortgaging is when you switch from your current mortgage to a new mortgage for a better deal. However, it is possible to remortgage for more money and tap into your equity. This is beneficial because it keeps all your debt in one place. Instead of having an existing mortgage and a loan provider, you’ll just have one lender to deal with. Remortgaging may also grant you access to some of the best interest rates, and they can be as low as home equity loan rates. 

  1. Reverse mortgage

A reverse mortgage is a solution for people over 55 who own their home without an existing mortgage. It’s ideal if you do not wish to leave the property to someone else upon death. The reverse mortgage will give you a loan based on your home equity (in this case simply how much the property is worth). 

The loan only needs to be repaid if the property is sold; otherwise, it is paid back from the homeowner’s estate when they die, which may involve selling the property at that point. As there are no monthly payments to be made, the interest rate is irrelevant. 

Trying to consolidate your debts?

If you were trying to consolidate your debts with a home equity loan, you can also use the options listed above, except for a home improvement loan. You can also use debt consolidation loans, balance transfer credit cards, Debt Management Plans or another debt solution. Speak with a UK debt charity for further support and tailored advice. 

Further information on loans and interest rates

MoneyNerd has created a huge selection of articles and guides all about home equity loans and interest rates. Find out more today by jumping back on our website and typing your question into our search function. It’s probably been asked by scores of other readers and we’ve probably already answered it in a friendly easy-to-read guide. 

Check back with us soon! 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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