For UK homeowners, tapping into your home's equity can be a strategic way to unlock financial flexibility. One popular option in the USA is a Home Equity Line of Credit (HELOC), which allows you to borrow against the equity you’ve built up in your home. Relatively new to the UK market, HELOCs can be a little tricky to get your head around at first. But that needn’t be the case. Let’s lay out the reasons why you might want to choose a HELOC over other types of credit or loans.
1. Flexible access to funds
A HELOC operates a bit like a credit card, but it’s secured against your property. You’re given a credit limit based on your home’s equity and can borrow as needed. Once approved, the funds are multi-purpose; you can use them to consolidate personal debt, refurbish your home, or pay for school fees. You can also take out funds in stages rather than in one lump sum. This flexibility can be particularly useful for homeowners planning long-term projects, like home renovations or extensions, where costs arise over time. It also means if you end up using less than you predicted, you’ll have smaller repayments too.
Example: let’s say you want to extend and refurbish your kitchen. With a HELOC, you can draw down funds to pay for the foundation work first, and then pay for the carpentry and appliances later when you need them.
2. Lower interest rates
Since a HELOC is secured against your home, lenders typically offer lower interest rates than unsecured loans like credit cards. This can make it a cost-effective way to borrow, especially if you’re funding larger purchases.
Pro tip: always speak to an advisor, and if you can, compare interest rates from different lenders. Even a small difference in percentage points can save hundreds of pounds over time.
3. Only pay interest on what you use
With a HELOC, you're only charged interest on the amount you’ve borrowed, and not on the full credit limit. So, if you don’t need to access all the funds immediately, you won’t need to pay interest on the full amount. This could be a great option if you’re planning that kitchen renovation we mentioned earlier, but it’s also appealing if you want financial flexibility without committing to high monthly repayments.
Example: independent school fees are generally paid each term. Instead of borrowing years worth of school fees with a standard loan and paying the school each term in instalments, you can draw down at any time with a HELOC, and just pay interest on the outstanding balance.
4. Great for home improvements
One of the most popular uses of a HELOC is funding home improvements. Not only can it help you make the upgrades you’ve been waiting for, but if done wisely, these improvements could boost the value of your property over time.
We wouldn’t really recommend a HELOC for small changes (like repainting or replacing a few things around the house). Instead, use the funds to make your home more attractive to future buyers; things like adding energy-efficient windows, a conservatory, a new bedroom or creating an ensuite bathroom.
5. Opportunity to consolidate personal debt
For homeowners juggling multiple high-interest debts, a HELOC can be a smart way of simplifying finances by merging multiple debts into one. By paying off credit card balances, car finance, personal loans, or other debts with a lower-interest HELOC, it can be easier to plan and manage your repayments.
Find out more about debt consolidation loans
6. Flexible repayment options
Many HELOCs offer flexible repayment options, giving you control over how much to overpay. With a Selina HELOC, you can spread payments over a pre-agreed term of 5 to 30 years, with the added flexibility to make overpayments during the first 5 years. This flexibility can provide some much needed breathing room at times when your cash flow might be tight.
7. Keep control of your equity.
Unlike selling a share of your home or using equity release schemes that reduce your equity, a HELOC allows you to retain full control. It also doesn’t require you to renegotiate the terms of your primary mortgage, as remortgaging would. However, as a type of mortgage, it’s important to consider how it might affect your ability to secure additional borrowing against your home in the future.
Final takeaways: is a HELOC right for me?
Used responsibly, a HELOC can offer a lot of financial flexibility, and valuable advantages. As a secured loan with lower interest rates, it’s important to remember the trade off: your home is on the line. Careful consideration should be given to your financial situation, future plans, and your ability to manage payments.
If you're looking for low-cost, flexible borrowing that works for home improvements, debt consolidation, or other major expenses, a HELOC could be a great choice. Before making a decision, it’s a good idea to speak with a financial advisor who can guide you based on your personal circumstances and goals.
To learn more about how Selina can help improve your personal finances, visit our site or speak to one of our advisors today
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.
