Ever wondered how a Home Equity Line of Credit (HELOC) works and whether it could be right for you? Our ultimate guide explains everything you need to know.
What is a HELOC?
A home equity line of credit, or HELOC, allows you to borrow against the equity that you’ve built up in your property over the years. The loan is secured against your main or secondary residence, and funds are received as a line of credit.
Funds can be used for many purposes. Common examples include paying for home improvements, a new car, private school fees or a holiday of a lifetime.
How does a home equity line of credit work?
The flexibility of a HELOC works in a similar way to a credit card. Rather than borrowing a lump sum as you would with a standard loan, you can continuously borrow against your line of credit up to a certain limit and within a set timeframe of 5 years.
The advantage of this is if, for example, you are carrying out home improvements that end up costing more than you originally expected, you can simply borrow more from your line of credit. In comparison, if you had used a standard loan for your home renovations and your funds didn’t stretch far enough, you might have to look for an additional form of borrowing.
With a HELOC, you repay the amount borrowed, plus interest, in monthly instalments. You’ll only ever pay interest on the funds you use. So if your home renovations don’t turn out to be as expensive as you first thought, for example, you won’t pay for the amount you haven’t touched.
Repayments are flexible and you can choose to pay more on a monthly basis whenever you want to, without paying any penalty fees. When overpaying, you can choose to either reduce the duration of your term or keep the same term but have lower monthly repayments.
Can I get a HELOC in the UK?
Yes, you can. HELOCs are commonly used by homeowners in the US, Canada and Australia, but Selina Advance is the first provider to offer a HELOC to those living in the UK.
What is the HELOC draw period vs repayment period?
The draw period is the period in which you can draw down funds whenever you wish to. With Selina Advance, this draw period (or ‘flexible’ period) is five years.
After this, you can no longer access your funds and your HELOC will turn into a standard loan. You then repay for the funds you used, plus interest, until the end of the term. This is known as the repayment period.
How long can I borrow for?
You’ll be able to choose a term to suit you. That means you can choose to repay it over a maximum period of 30 years. When making a decision, you’ll need to consider how much you’re borrowing, what rate of interest you can get and how much you can afford to repay each month. Our qualified advisors will help you with this decision.
How much can I borrow with a HELOC?
At Selina Finance, the minimum HELOC amount you can borrow is £10k and the maximum amount is £500k. You’ll be able to borrow up to 85% LTV with variable rates.
Are there any fees with a HELOC in the UK?
When you apply for the Selina Advance HELOC, a one-off product fee of £1,395 will apply. You can choose to pay this upfront or add it to the balance and repay it as part of your monthly instalments (but you will then pay interest on it).
You won’t usually need to pay any valuation costs and there are no early repayment charges - ever. This means if you decide you want to repay the amount borrowed earlier than planned, there’s nothing to stop you. Whether you want to repay in part or in full, during or after the 5-year flexible period, there are never any extra costs.
What are the benefits of a HELOC?
Some of the biggest benefits of using a HELOC include:
- You can borrow more than you would be able to with a personal loan or credit card
- You only pay interest on the amount you use
- You can borrow as and when you need to
- Interest rates are competitive
- You can use the funds for many purposes (conditions apply e.g. you cannot use for gambling)
- You can increase your monthly payments, if you choose to do so
- There are no early repayment fees
Will my property be eligible for a HELOC?
The property you’re using as security for a HELOC will need to at least:
- Be owned by you for a minimum of six months
- Be within an 85% maximum Combined Loan-to-Value (CLTV) – this means your outstanding mortgage plus any other loan secured against the property (including a HELOC) shouldn’t exceed 85% of the value of your property
Will a HELOC affect my credit rating?
In much the same way as any other form of credit, using a HELOC could have a positive or negative impact on your credit score. However, if you repay the amount you’ve borrowed in full and on time, your credit score will likely go up.
What documents do I need to apply for a HELOC in the UK?
When you apply, you will need to complete an identity verification check and provide proof of ID such as a passport or driving licence, and proof of address. You will also need to upload proof of your income, including bank statements.
HELOC UK jargon buster
- Line of credit – a credit facility that can be tapped into at any time, up to a set limit and within a set period.
- Draw period – the period in which you can draw down or repay funds whenever you need to. With the Selina Advance HELOC, this period is of 5 years.
- Collateral – an asset (in this case, your home) used as security for the repayment of a loan.
- Equity – the value of how much of your property you own.
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