Should you get a home equity loan?
A home equity loan is an additional mortgage against your property.
They’re also known as second charge mortgage loans, secured loans, and homeowner loans.
There are lots of reasons why you could consider taking out a home equity loan.
You might want to:
do some home improvements
pay off another more expensive debt, like a credit card
get some cash for a deposit to buy another property
How much you can borrow
Like your first mortgage, a homeowner equity loan is secured against your home.
How much you can borrow depends on the amount of equity you have in your home.
The equity is the value of your property after your mortgage is deducted. So, for example, if you own a home worth £300,000 and have a mortgage of £200,000, then you have £100,000 in equity.
In this case, you could borrow up to £100,000 providing you could afford to repay both your first mortgage and your homeowner equity loan.
Benefits of a home equity loan
While it could be more cost-effective to remortgage your home if you need some cash, there are some cases when getting a home equity loan could be a more suitable option.
One of them is if you have an extremely low rate mortgage that’s no longer available.
For example, some people took out lifetime mortgages that tracked the Bank of England base rate before the credit crunch. They’re now extremely cheap given that the Bank rate has hovered between 0.25% and 0.75% since 2009. (1)
A home equity loan could also be a better option if your first mortgage has a high Early Repayment Charge.
Risks of a home equity loan
If you take out a home equity loan to pay off other debts, bear in mind that the loan could run for a number of years. So it could be more expensive in the long run.
Another thing to be aware of is that by raising money to consolidate your debts, your unsecured debt will become secured against the property. This means that if you default on your mortgage payments, you could risk losing your home.
You also need to make sure you don’t take on too much debt. Even if you can comfortably afford to repay your first charge mortgage, another loan could have a significant impact on your finances.
“There are some situations where taking out a home equity loan is a good option. For instance, if you need to raise money and don’t want to disturb your current mortgage,” said Prakash Patel, a Mortgage Adviser at Trussle.
“However, remortgaging your home could be more cost-effective than taking out a home equity loan. To be sure, get some free advice from a mortgage broker about which would be the more suitable option.”
(1) Bank of England