In this brief guide, we are going to discuss how to get a home equity loan in the UK.

What is a home equity loan in the UK?

A home equity loan in the UK is a loan which is secured on your home. To secure a home equity loan you will need to have equity in your home.

To measure the equity you have in your home you will need to subtract any outstanding mortgage balance or secured loan balance from the value of your home.

Example, if your home is worth £200,000 but you have an outstanding mortgage balance of £100,000 on it and a secured loan of 30,000 on it then the equity you have in your home is £70,000.

You can get a local estate agent to value your home or get an online valuation of your home.

The lender will get the value of your home before deciding on if to give you a home equity loan or not.

Once you have figured out how much equity you have you will then know if the lender will be able to give you the equity loan you want

When you take out a home equity loan in the UK a second charge will be placed on your home if you already have a mortgage.

If you don’t have a mortgage then a 1st charge will be placed.

A charge on your property means that you will lose your property through a home repossession if you fail to make the monthly repayments on your home equity loan.

Due to having the security as your home you will find that home equity loans in the UK tend to have a much smaller interest rate than unsecured loans in the UK.

Due to the fact that most home equity loans will be 2nd charge loans on homes which already have mortgages they tend to be much more expensive than mortgages as if there was to be a home repossession they will be 2nd in line to recoup their outstanding balance and there is no guarantee they will recoup all or any of their outstanding balance.

With a home equity loan in the UK, you will usually be able to borrow from between £3,000 to £100,000 and spread the repayments over up to 25 years.

The application process for home equity loans in the UK is generally straightforward and you can expect to receive the loan within 4 to 6 weeks of making an application.

What can you use a home equity loan for?

You can use a home equity loan for a variety of purposes. The lender will usually ask you what you need the loan for and may reject your application if they don’t feel comfortable with your plans.

Most people use home equity loans for holiday, to renovate their homes by building extensions, lofts, driveway or installing a better kitchen.

Some of these things can go on to add much more value in the home than the debt owed on the home equity loan.

You can also use a home equity loan as a debt consolidation loan.  A debt consolidation loan is when you get a new loan to pay off all of your old debts so you can have lower monthly repayments and/or a cheaper total cost of interest over the lifetime of the loans you previously owed.

You may also be able to use a home equity loan in the UK to fund expenses such as a wedding or university fees for your children.

If you have successfully applied for a home equity loan this will usually be sent to you by cheque or by direct bank transfer.

Are you eligible for a home equity loan?

To be eligible for a home equity loan you will need to be at least 18 years and have sufficient equity in your home. You will also usually need to be able to afford the monthly repayments on the home equity loan.

How much can you borrow on a home equity loan?

Generally speaking, you can usually borrow as much as £100,000 on a home equity loan but most lenders will have a minimum borrowing amount of £3,000.

What term can you get on a home equity loan?

In the UK you can usually get a home equity loan for a term of between  3 and 25 years.

What interest rates can you get on a home equity loan?

The interest rates on a home equity loan in the UK will be determined based on 3 main factors

They include:

Your credit score:

The lender will look at your credit score and your credit history to determine what interest rate to charge you. If you have had bad credit in the past then the lender may charge you a higher rate of interest.

Your loan to value:

The lender will also look at the loan to value to determine what rate of interest to charge you. If you have a high loan to value then it is likely you will get charged a higher rate of interest.

Your product choice:

You will have a choice of either a fixed rate home equity loan or a variable rate home equity loan. Based on the one you choose the lender will charge you the relevant rate.

Can I use my home equity loan to consolidate debts?

Yes, you can use your home equity loan to consolidate debts.

By consolidating your debts with a home equity loan you could reduce the number of monthly repayments you have to one.

This could make it much easier for you to manage your finances.

You may also benefit by saving interest over the total lifetime of all your prior debts with a home equity loan which has a total cost of interest which is lower.

You should be aware that in some cases you may end up paying a higher total cost of interest over the lifetime of the home equity loan than you would have paid on the original debts which you consolidated.

This is because you may be paying for those debts over a much longer time period with a home equity loan.

Can you get a home equity loan if you have bad credit?

Yes, you may be able to get a home equity loan if you have bad credit but this will be judged and determined by each lender on a case by case basis.

Most lenders will pay attention to how long ago you incurred the bad credit.

They will also look at what type of bad credit it was and make a determination on if to lend to you or not.

You can expect to pay a higher rate of interest if you have bad credit.

Bad credit could include:

  • A CCJ
  • Missed or late credit repayments
  • A default
  • Bankruptcy
  • Home repossession
  • A debt management plan
  • An individual voluntary arrangement

Can you get a home equity loan if you are self-employed?

Yes, you may be able to get a home equity loan if you are self-employed. A home equity loan for self-employed borrowers is much easier to get than a mortgage.

There are many lenders that will consider you if you don’t have up to 3 years of income or an unable to prove that you have a reliable income.

If you are self-employed and worrying about if you could get a home equity loan then you may want to speak toa mortgage broker.

What is the difference between a remortgage and a home equity loan?

A remortgage is when you get a new mortgage to repay an existing mortgage. This could be from the same mortgage lender or a new mortgage lender.

A home equity loan does not affect your current mortgage(if you have one). You simply get a 2nd charge loan which is secured on your property.

A home equity loan is a good way to raise additional funds if you don’t want to switch your mortgage provider due to having a good introductory deal on your current mortgage or a high early repayment fee.

Can you sell your house with a home equity loan?

Yes, you can sell your house with a home equity loan.  To sell your home with a home equity loan you will have to repay all secured loans on your home. This could be your mortgage and will include your home equity loan.

You will use the proceeds of the home sale to repay those.

Can you pay your home equity loan early?

Yes, you can pay your home equity loan early. You will generally have to pay between 1 and 2 months of interest as a charge if you pay your home equity loan early but this may be reduced if you give prior written notice to the lender.

What is the difference between a home equity line of credit and a home equity loan?

A home equity line of credit operates similar to a credit card. the lender will give you a line of credit which is secured on your property. You can drawdown funds from this line of credit as you please but will have repayment terms which you must stick to.

A home equity line of credit if you ay need irregular amounts of money over a long period of time.

On the other hand, a home equity loan will be released to you in one large lump sum and you will begin regular monthly repayments immediately.

Using a mortgage broker to get a home equity loan

You may want to consider using an independent mortgage broker to get a home equity loan.

Mortgage brokers are important as they can access home equity loan products from across the whole of the market in some cases.

They will then advise you on which ones best match your circumstances and assist you in securing a home equity loan product.

In this brief guide, we discussed how to get a home equity loan in the UK.

If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.