Home Equity Line of Credit (HELOC) Loans
What Is a HELOC Loan?
HELOC stands for Home Equity Line of Credit and is a loan secured against an individual's home. It is more flexible than a standard second mortgage as it allows borrowers to draw funds as and when they need to, up to an agreed amount.
One big difference between a HELOC and a standard second mortgage product is that a HELOC loan charges interest only on the amount withdrawn. Lender repayment terms vary but most will offer borrowers terms for between 3 and 25 years.
A HELOC is essentially a second mortgage, also known as a second charge mortgage, secured loan or homeowner loan. So, in the event of a borrower not being able to afford the monthly repayments, the lender may take possession of their property as a way of recovering their monies.
Are HELOCS Available in the UK?
HELOC loans are especially popular in the US. However, they are less so in the UK. Nonetheless, this is set to change as more people understand the many benefits of HELOC loans. For instance, they are flexible and can allow borrowers to save money long-term.
This type of homeowner loan is available from retail banks, building societies and other financial institutions. Nevertheless, the most flexible lender that offers a Home Equity Line of Credit in the UK is Selina Finance. A Selina Advance will allow you to borrow knowing that you will only be paying interest on the amount you have drawdown.
If you would like to secure a HELOC loan online, we can help. The Second Mortgage Company can connect you to the best loan rates in the UK. Get in touch.
What Can I Use a HELOC Loan For?
There are numerous reasons why people prefer a HELOC loan over a standard second mortgage loan. While you wouldn’t benefit from a HELOC loan for purchasing a single item, such as a car, the below examples demonstrate how a HELOC loan could be used.
Home Improvement Projects
While it is not suitable for someone who wants to replace a bath or shower, for instance, is ideal for someone carrying out extensive home improvements that wouldn’t require all the funds immediately.
For example, if someone extended their property over two floors to create two new bedrooms and ensuites, there would be little point in buying the bathrooms now as they may not be installed for another six months. Another reason not to buy bathrooms at the beginning of the project is that they will take up storage space and may get damaged whilst building works are carried out.
With the flexibility of a HELOC loan, you could draw the funds to start the works and withdraw further funds as and when you need them.
Fees are generally paid each school term. This means that rather than borrowing years of school fees with a standard loan and paying the school each term, you can agree on an amount with a HELOC lender and draw the amount each term.
For example, if you are looking to cover five years of school fees at £7,000 per term. Assuming there are three terms a year, the cost per year would be £21,000 with a total payable of 5 years of £105,000.
If you took out a standard second mortgage you would get a lump sum of £105,000 and pay the school fee each term. The downside to this is that you are paying interest on the loan of £105,000 from day one. With a HELOC loan, you would agree to borrow £105,000 but only draw £7,000 each term.
The major benefit is that you are only being charged interest on the outstanding balance at any time.
Is a HELOC Loan Right for Me?
If you are looking to consolidate debts against your home you need to be careful with a HELOC loan that you don't start drawing amounts once you've repaid your loans and credit cards as this will only put you more and more in debt.
It could be argued that it would be safer to take out a standard second-charge mortgage home equity loan in that you won't be able to withdraw further amounts once the loan has been completed. This takes away the temptation of being able to draw down further monies for unnecessary purchases, such as a holiday.
Do I Qualify for a HELOC Loan?
When speaking to a specialist mortgage broker for financial advice they will ask you several questions and establish if a HELOC loan is suitable for you. They may also recommend that you take out a fixed-rate product which is often fixed for the first 2, 3 and 5 years. It's important to note that with fixed-rate loans you may incur an early repayment charge if you were to pay off the loan in the fixed-rate period.
Your application is then underwritten to establish if you fit the lender’s criteria for a secured loan. During the underwriting process, the lender considers three main points:
1. Your Credit Score
The higher the credit score the more likely you are to get the amount you require at a competitive interest rate. This is because an individual’s credit score is a numerical reflection of their creditworthiness. In other words, a credit score tells lenders how responsible you are when borrowing money.
If you have a bad or low credit score that’s not to say you can’t get a HELOC loan. It may mean that you are viewed as more of a risk which will be reflected in higher interest rates.
There are several reasons why your credit score may be low. For example, you may have missed some payments on some of your loans or credit cards. If it’s not essential to borrow now, it might be worth considering delaying a loan application and applying at a later date when the lender can see you’ve made all regular payments on your current debt.
2. Your Home Equity
The equity is the difference between the value of your property and any mortgage outstanding on it.
A lender lends up to a percentage of the value of a property which is referred to as the loan to value or LTV. For example, if a lender is prepared to lend to the maximum amount you could borrow would be £50,000 (£300,000 x 75% = £225,000 less mortgage of £175,000 = £50,000). The lower the LTV the better interest rate you can obtain.
Can you afford the loan? While you might feel you can easily meet the monthly payments and want to get the home improvements completed as quickly as possible, it’s very important that you can afford the loan now and in the future. As a result, the lender will carry out a detailed assessment of your income and outgoings.
When doing this they will carry out a stress test which works out whether you could still make the payments if there was an increase in your first mortgage repayment.
With the loan being secured against your property, your home may be repossessed if you can't repay the loan. Therefore, you need to think carefully before securing a loan against your home.
How to Apply for a HELOC Loan