Home Equity Loan Pros and Cons

A home-secured loan can provide funds, but its cost depends on the product and circumstances. The property is at risk if required repayments are not maintained.

Here’s what we’ll cover in this article:

•  The basics of a home equity loan
•  The risks of a poor home equity loan
•  Various uses of home equity loans
•  The good and bad points of a home equity loan
•  The typical payback time of a home equity loan

We understand that these topics can be tricky, but we're here to make them simpler for you.

Home equity – quick recap!

Home equity is the current property value less all debts secured on it. Use a realistic current valuation rather than the original purchase price.

Let’s imagine your home has a current market value of £300,000 and you still need to pay off £200,000 through an existing mortgage. In that case, the property’s value minus the remaining mortgage payments equate to £100,000 equity in your home.

Pros and cons of home equity loans

Understanding the extent of the pros and cons of equity loans is a prerequisite to deciding if you should use one. Below we have listed the major benefits and disadvantages of using one of these loans.

Is it bad to take equity out of your house?

Borrowing against a home can be a significant long-term commitment. Consider whether the spending is necessary, affordable and suitable for the term, and compare alternatives.

A secured loan is not automatically cheaper than unsecured credit or refinancing. Compare the full repayment and fees as well as the interest rate.

However, they may not be a good idea for you and your specific circumstances. You should get professional advice from finance professionals or a mortgage broker before making a decision. And you should learn about the standard pros and cons of a home equity loan first

Can you lose your house with a home equity loan?

The loan is secured on the property itself, potentially behind an existing mortgage. Equity is the remaining value, not a separate asset. Default can lead to repossession through the applicable legal process.

Sale proceeds meet relevant costs and secured claims in their priority order. Any surplus belongs to the owner; a shortfall can remain payable.

Contact the lender and a free debt adviser promptly if payments become difficult. Forbearance options depend on the circumstances and are not a guarantee that repossession will be avoided.

Advantages of home equity loans

1. Access a larger amount of credit

Secured borrowing may allow a larger amount than some unsecured products, subject to security and affordability. There is no universal £30,000 personal-loan maximum.

2. Access lower interest rates (not guaranteed!)

A lower interest rate is possible but not guaranteed and may not mean a lower total cost. A fixed rate lasts for its specified period, which may be shorter than the full term.

3. Longer repayment terms

The repayment terms of these loans can be considerably longer, as long as three decades in some cases. This might be because you’ve borrowed more than you would with an unsecured personal loan, but they still tend to allow longer repayment periods for smaller loan amounts too. 

4. Used for multiple purposes

Tell the lender the purpose of the loan and check permitted uses. Restrictions vary by product.

Home improvements may increase value, but the increase can be less than the project and borrowing cost. Future values are not guaranteed.

Disadvantages of home equity loans

1. Greater risk

The property is security, so missed payments can ultimately put the home at risk.

The loan is secured on the property. Missed payments can lead to repossession through the applicable legal process; security does not remove affordability checks or give the lender an automatic right to take the home without that process.

2. Decreasing home value

The risks are heightened by the possibility of your home becoming less valuable. The equity you have in the property can decrease through a number of factors outside your control, such as changes to your local area. 

If you can’t pay off this debt and are forced to sell, and the property sells for less than it was worth when the loan was taken out, you could end up owing even more after the sale and go bankrupt. 

3. Additional expenses

Check all applicable broker, arrangement, valuation and legal charges before accepting an offer, including when they are payable.

What fees apply to a home-secured loan?

There is no universal UK “closing cost” percentage or rule that such a fee is paid at the end. Charges depend on the particular agreement.

Request an itemised quotation and total repayment illustration. Adding fees to the loan can mean paying interest on them; unsecured products can also have charges.

How many years do you have to pay off a home equity loan?

The period of time you get to repay a home equity loan will be strongly determined by the loan amount and the lender. A home equity loan may need to be repaid anywhere between five and thirty years.

A US-style home equity line of credit (HELOC) should not be assumed to be a standard UK product. Any UK revolving or drawdown secured facility has its own availability, fees and payment terms. Check whether interest or capital payments are required during the drawdown period and how the balance must be repaid.

HELOC vs home equity loan: pros and cons

Compare the actual payment schedule, fixed or variable rate and term. Both lump-sum and drawdown secured borrowing expose the home to changes in property value and repayment risk.

Drawdown interest and fees depend on the agreement, including possible charges on unused funds. Staged borrowing requires a clear repayment plan and is not automatically cheaper.

Approval for either is based on your financial situation and credit score. 

Alternatives to a home equity loan

Even though a home equity loan can be an advantageous way to access large credit, some homeowners are reluctant to use them. One of the common reasons for avoiding these loans is that they’re based on the home’s value which could change and because it puts the property at risk. 

If that sounds familiar, here are some alternative options:

1. Unsecured personal loans or credit cards may be alternatives for some amounts and purposes. Compare eligibility, fees, promotional periods and full repayment rather than assuming a fixed maximum or equivalent rate.
2. Consolidation replaces debts with new borrowing. It does not reduce the amount owed automatically, and securing unsecured debt can put the home at risk.
3. Remortgaging with additional borrowing replaces the existing mortgage with a larger one and can release funds. It is different from a separate second-charge mortgage; include settlement and new-product fees.
4. Later-life equity release includes lifetime mortgages and home reversion. A lifetime mortgage is normally due after the last borrower dies or moves permanently into care; unpaid interest can compound. Eligibility, inheritance effects and benefits require specialist advice. See related guidance.