What is a home equity loan?
A home equity loan is a loan that is secured on your property. If you have equity in your home – the difference between your property’s value and any outstanding mortgages/secured loans – then you can borrow some or all of this equity.
A home equity loan involves the lender taking a legal ‘charge’ over your home as security for the loan. This means that your home is at risk if you don’t keep up repayments on the loan.
Am I eligible?
Yes, if you are a homeowner and you meet the minimum age requirements (typically 18 or 21). You will also need to have some equity in your property and an income sufficient to cover your loan repayments.
How much can I borrow?
The amount that you can borrow depends on the equity on your home and your income. You can generally borrow between £3,000 and over £100,000.
What term can I spread my repayments over?
You can typically repay your loan over a period of between 3 and 25 years.
What interest rate will I be charged?
Your interest rate will depend on three main factors. Firstly, it will depend on the proportion of your home’s value that you wish to borrow. Generally speaking, the higher your ‘loan to value’, the higher your interest rate will be.
Secondly, your interest rate will be determined by the type of loan product that you want. There may be a choice of fixed or variable interest rates and so your rate will depend on the product that you choose.
Finally, your interest rate will be determined by your credit history. If you have a less than perfect credit history – perhaps you have a County Court Judgment or default – then you may pay a higher interest rate than other applicants.
How will I receive the loan?
You can normally choose to receive your secured loan either by cheque or by direct transfer to your bank account.
What can I use the loan for?
You can use the equity loan for almost any purpose. Many people use home equity loans to raise cash to consolidate other debts such as credit cards or personal loans. As well as simplifying your finances and reducing your monthly outgoings you can also often find that you pay a lower interest rate.
You can also use the loan to fund home improvements. Whether you want to convert your loft, fit a new kitchen or bathroom, build an extension, landscape your garden, repair your roof, install central heating or redecorate your home, a home equity loan can provide the money that you need.
In addition, you can also use it for a range of other purposes. You may want to pay for a one off purchase such as a wedding, dream holiday or new car or you may want to help your child through university or college. Others use home equity loans to fund their business or to buy a second property.
Can I use the loan to consolidate debts?
Yes. Home equity loans are often an excellent solution to consolidate debts. As the loan is secured on your home, the lender will often charge lower interest rates than on other types of borrowing. So, you can raise money against your home in order to pay other high interest debts such as loans or credit cards.
In addition, as you can spread your loan repayments over a term of up to 25 years, consolidating your debts into one secured loan often significantly reduces your monthly outgoings. It also removes the need for you to pay multiple debts to multiple creditors every month, simplifying your household finances.
What’s the difference between a home equity loan and a remortgage?
A remortgage involves you switching your entire mortgage from one lender to another and, often, borrowing additional funds in the process. A home equity loan means your mortgage remains with your current lender and you take out a separate loan with another provider.
A home equity loan is a useful alternative to a remortgage if you don’t want to switch you main mortgage – perhaps you are benefiting from an excellent mortgage deal – or if you are struggling to obtain agreement for a remortgage.
What if I have bad credit?
Home equity loans are available to applicants with bad credit. As the lender uses your home as security for the loan, the lender is exposed to much less risk than with unsecured products. This means that they are much more likely to consider an application from you if you have arrears, defaults, missed payments or County Court Judgments (CCJs).
Bear in mind that you may pay a slightly higher interest rate on a homeowner loan if you do have poor credit.
Can I get a loan if I am self employed?
Yes. While many banks are reluctant to agree loans and credit cards for self employed applicants, home equity loans are readily available. Even if you are struggling to prove your income – perhaps because you don’t have three year’s company accounts or because you are newly self employed – a home equity loan provider will be happy to consider your application.
Can I pay back my loan early?
Yes. You can pay back your loan whenever you like. You may want to repay the loan through a bonus from your employment, a savings maturity or an inheritance.
Most home equity loans are regulated under the Consumer Credit Act, meaning that you will generally pay a maximum of 1-2 months interest if you repay your loan early. If you provide written notice of your intention to repay your loan you may pay a lower charge.
What happens if I want to sell my house?
If you sell your home then your home equity loan will have to be repaid along with any other secured loans or mortgages.
If you subsequently buy another property you may be able to apply for a home equity loan on your new home, depending on your income and the amount of equity you have.
Is a home equity loan the same as a home equity line of credit?
No. A home equity loan is a loan that is advanced as a lump sum. You receive the total amount of the loan and you start making repayments to the loan on a monthly basis straight away.
A home equity line of credit is a credit facility agreed by the lender. Again, it is secured on your home but the main difference is that you do not have to take the total loan in one go. You can draw smaller sums of cash up to your credit limit, repay lump sums and re-draw your borrowings whenever you like, as long as you stay within the loan facility that has been agreed.
A home equity line of credit is useful if you need to draw funds over a longer period. For example, you may want to meet university fees over several years or you may want to undertake a series of home improvements.