The Pros and Cons of a Home Equity Loan

Increasingly, UK homeowners are turning to home equity loans to tap into the cash they have tied up in their properties. As average house prices continue to skyrocket, people are finding themselves sitting on small fortunes and taking full advantage of them.

With a home equity loan, it is possible to release as much as 85% of the equity you have tied up in your home. This means that if you have a home with a market value of £400,000 and you have repaid £200,000 on your mortgage, you could borrow as much as £170,000.

Essentially, a home equity loan works similarly to a second mortgage. You can borrow anything from £10,000 up to the maximum LTV (loan to value) the lender will offer, usually capped at 85%. Best of all, the funds can be used for almost any legal purpose, with almost no restrictions whatsoever.

How does repayment work with a home equity loan?

Addressing the obvious elephant in the room, your home may be at risk of repossession if you do not keep up with your equity loan repayments. Paying back a home equity loan works in the same way as a mortgage, an ongoing series of monthly repayments, as agreed with your lender.

Unlike a mortgage, there are no deposit requirements to take out the loan, and the facility can be arranged much faster.

Interest rates and borrowing costs vary significantly from one lender to the next, highlighting the importance of shopping around for a good deal.

What are the advantages of home equity loans?

The biggest benefits of taking out a home equity loan are as follows:

• Access a large amount of credit: For eligible homeowners, home equity loans provide the opportunity to access significant amounts of tied-up capital. You may be able to borrow up to 85% of the equity you have tied up in your home, far more than any personal loan or unsecured product.

• Lower interest rates: Loans secured against assets of value almost always have lower rates of interest than comparable unsecured products. The provision of assets as security for the loan makes it a lower-risk facility in the eyes of the lender.

• Longer repayment terms: Repayment terms on a home equity loan are flexible and can be tailored to suit the requirements of the borrower. Depending on how much you borrow, you could repay the loan gradually over anything from five to 35 years.

• Wide range of uses: Most lenders place comparatively few restrictions on how a home equity loan can be used. From home improvements to investment property purchases to funding new business start-ups, the funds are yours to do anything you want with.

What are the disadvantages of home equity loans?

Before applying for a home equity loan, it is important to consider the following drawbacks:

• Risk of repossession: If you fall behind on your repayments, your lender may begin repossession proceedings and seek to take ownership of your home. It is therefore inadvisable to apply for any kind of secured loan unless you are 100% confident in your ability to repay the facility in full.

• Long-term debt: The decision to enter any form of long-term debt should not be taken lightly. This counts double if you are still repaying your original mortgage, and you will subsequently find yourself with two equally important monthly outgoings to cover.

• Additional fees and costs: Depending on whom you work with, arranging a home equity loan can be anything from highly affordable to extremely expensive. Arrangement fees, valuation fees, administration fees, broker fees, and exit fees may all apply, so it is important to shop around for a good deal.

Can I repay a home equity loan early?

If you change your mind and decide to repay your home equity loan early, you are perfectly within your rights to do so. However, the vast majority of lenders impose early repayment fees in order to compensate for lost interest.

This is something to be particularly mindful of when formalising your agreement. Early repayment fees vary significantly between products and lenders and should be considered carefully before taking out any secured loan.