Homeowner Loans Vs HELOCs
Homeowner Loans & HELOCs Compared
Find out the key similarities and differences between home loans and HELOCs.
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in homeowner loans
When looking to release equity from your property on a second charge basis, there are 2 main products to choose from, a homeowner loan or a HELOC.
While homeowner loans are reasonably well understood by many homeowners, many are completely unaware of HELOCs and how they work.
Both allow you to borrow money against the equity in your property while leaving your current mortgage untouched. While both have this in common, there are also some key differences to understand.
In this guide, we break down the key differences, how each product works, how to choose the right option for you and the alternative ways to borrow should neither option work for you.
What is a homeowner loan?
A homeowner loan is a loan that is secured against a property. The security property can be either your home or an investment property (known as buy to let homeowner loans). Almost any property can be used, as long as it has enough equity to meet your chosen lender’s LTV requirements.
Homeowner loans are known by a few names in the UK, which can lead to confusion, such as secured loans, home equity loans and second charge mortgages.
They’re often used to raise funds for debt consolidation, to fund home improvements or to finance a major purchase, such as a wedding or the purchase of a new car. Homeowner loan rates are usually lower than those offered for unsecured credit such as personal loans or credit cards.
This is due to the fact that the lender has security by way of a legal charge over your property (in the same way as a standard mortgage).
How much can I borrow using a homeowner loan?
Borrowing amounts range from £10,000 to £500,000, or even more sometimes, depending on the lender chosen.
These loans are a longer-term type of borrowing, with the loan term usually being between 10-25 years.
The amount you can borrow is decided based on your property value, the proposed loan to value ratio, your credit score (or credit history) and the lender’s affordability guidelines.
There are several different types of homeowner loans including homeowner debt consolidation loans, homeowner loans for home improvements, fixed rate homeowner loans and bad credit homeowner loans.
What is a HELOC?
A home equity line of credit (HELOC) is a form of secured revolving credit that allows a property owner to borrow money against the equity in their property.
Unlike a loan, HELOCs allow the borrower to take out money and repay as they wish within an agreed credit limit, much like a bank overdraft or offset mortgage.
This has the advantage of allowing you to borrow the funds only when they’re needed and repay when you no longer need the funds.
The facility usually remains open for an agreed term, allowing you to use the funds when needed. When funds are drawn down, the borrower is obliged to make monthly repayments on the outstanding balance.
There are 2 distinct parts to a HELOC, they are:
- Drawdown phase – The drawdown phase lasts for 5 years and is the part of the facility that allows you to borrow and repay funds as needed flexibly. During this part of the loan, the facility acts as a form of revolving credit.
- Repayment phase – After 5 years have passed, your HELOC will change to act like a traditional loan. During this phase, you can no longer draw on funds that and your borrowing is effectively frozen. The loan is then repaid through regular payments (or a lump sum) until the balance reaches zero.
Much like a homeowner secured loan, borrowers with poor credit can get a bad credit HELOC.
How much can I borrow using a HELOC?
HELOCs allow you to borrow anything from £10,000 up to £500,000.
These facilities are a longer-term type of borrowing and can be taken over a term of 5-30 years with a maximum loan to value (LTV) of 85%.
The amount you can borrow is decided based on your property value, the proposed loan to value ratio, your credit score (or credit history) and the lender’s affordability guidelines.
Homeowner loans vs HELOCs
The decision between a homeowner loan and a HELOC depends on how much money you need and whether it is a one-off requirement or an ongoing revolving requirement.
For example, if you are looking to regularly invest in your business, with the funds being repaid and then utilised again, a HELOC could be a great fit.
Alternatively, if the need is one-off, for example, to consolidate unsecured debt, then a secured loan may be better.
Before committing to either product, consider whether you are happy receiving a fixed lump sum, or whether you would prefer the flexibility of a line of credit. Even a one-off requirement such as home improvements may benefit from the ability to draw more money if needed.
This allows you to add a contingency fund to cover any cost overruns without committing you to borrow the funds should everything come in on budget.
How to select the right loan for you
Selecting the right loan requires evaluating your needs and weighing the pros and cons of each option.
Of course, cost is an essential element when choosing a product, so talk to a homeowner loan broker and get a quote for each option.
A good broker will compare both options for you, explain the implications of choosing each product and even help you to get your application approved.
What can these products be used for?
Both products are often used for the following:
- Home improvements
- Debt consolidation
- Business investment
- Funding large purchases
- To fund property investment
- To fund school fees
While these are common uses, funds can be raised for nearly any purpose.
Are there any other ways to borrow against the equity in my property?
Yes, while both options are strong, there are other ways to borrow money against the equity in your property.
Before taking out additional borrowing, you should consider whether your current mortgage lender would be willing to lend you more.
This is known as a further advance and allows you to borrow money quickly. Another option is to consider remortgaging. A remortgage involves switching your current mortgage to a new lender and may allow you to release equity from your property.
