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.
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.
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.
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.
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.
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.
At Selina Advance, the minimum HELOC amount you can borrow is £10,000, and the maximum amount is £1 million. You’ll be able to borrow up to 85% LTV with variable rates.
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.
Some of the biggest benefits of using a HELOC include:
The property you’re using as security for a HELOC will need to at least:
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.
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.
Borrowing against your property has many advantages. For a start, because you are using your home as security, lenders will usually let you borrow a larger sum of money, which can be useful if you’re planning extensive home improvements, for example.
Investing in buy-to-let property can provide a regular source of rental income, plus a potential long-term capital growth from any increase in the property’s value. It’s for this reason that many people use buy-to-let as a way of funding their retirement.