A guide to borrowing against your property

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. 

You can usually borrow at cheaper rates of interest compared to unsecured borrowing, as well as over a longer timeframe, which means your monthly repayments are also likely to be lower.   

However, offering your home as security also means your home is at risk if you fail to keep with your repayments. Although this will usually be a last resort, it’s still important to keep this in mind if you’re thinking about borrowing against your property to make sure you fully understand the risks.

If you’re happy to proceed, there are a number of different loan types to consider. We’ve outlined some of the main options below.

Secured loans or second charge mortgages

A secured loan is, quite simply, a loan secured against your home. Because of this, secured loans are also known as homeowner loans, home loans or second charge mortgages. 

With a secured loan, you borrow a fixed sum of money over a set term. You then repay the amount borrowed, plus interest, in monthly instalments which are usually fixed at the same level for the term of the loan. Secured loans typically let you borrow upwards of £10,000 and repayment terms usually last up to 25 years, sometimes longer. Selina offers £10k and £250k Homeowner Loans with terms of 5 to 30 years.

Should you wish to pay off your loan earlier than the agreed term, you may have to pay an early repayment charge. This could be the equivalent of one to two months’ interest. 

A Homeowner loan can be a great option if you need all the funds required for your project on day one. 

Remortgaging

If your home has increased in value over the years, remortgaging enables you to release some of that equity so that you have extra cash available to you. To do this, you will need to ask your original lender (or another lender) to add the amount you want to release to your new mortgage.

Let’s say, for example, your property is worth £400,000 and you have an outstanding mortgage of £150,000. You want to release £50,000, so you ask your lender to remortgage for £200,000 rather than £150,000.

You will then repay the amount borrowed in monthly instalments over the remainder of your mortgage term. Be aware, however, that as the size of your mortgage will have increased, your monthly mortgage payments are also likely to go up. 

It’s also important to factor in the fees that will apply when you remortgage as these will increase the overall cost. Fees can include a product or arrangement fee, as well as solicitors’ fees. What’s more, if remortgaging means you need to get out of your existing mortgage deal early, there will often be an early repayment charge of around 1% to 5% of the amount you still owe.

HELOCs 

A home equity line of credit, or HELOC, works slightly differently to a standard secured loan or a remortgage. Although you still borrow against the equity that you’ve built up in your home, the funds are received as a line of credit, rather than a lump sum. 

If you qualify for a HELOC with Selina you’ll be able to borrow between £10k and £250k. You will then have a five year ‘flexible’ period during which you can draw on your funds as many times as you want (up to your agreed limit), and overpay if you wish too. 

This means that if your new kitchen or extension costs more than you originally thought, you can simply draw the additional funds from your HELOC, as long as the amount is still within your agreed limit. If you need to pay in stages, you don’t have to pay interest on the whole amount from the beginning. You can simply take the funds as and when you need to pay contractors. 

Interest is only payable on the amount you use, not on any funds left untouched. The full amount borrowed, plus interest, must be repaid during the term you chose.

However, monthly payments are flexible and should you want to pay a little extra one month or even pay off your loan earlier than planned, you can do so without paying an early repayment charge. You can choose your term, up to 30 years. It will all depend on how much you need to borrow, what rate of interest you can get and how much you can afford to repay each month.

With a HELOC from Selina, you will only have to pay a one time fee of £1,395 and there are no valuation fees in most cases.

Can I borrow against my home?

There are certain eligibility requirements that apply across each of the above options, no matter which you choose. For a start, you’ll only be able to borrow against your property if you’re a homeowner with sufficient equity. If there’s little to no equity in your home, you’re unlikely to get accepted for any of the above borrowing types. 

Having a good credit score will also increase your chances of getting accepted, particularly if you want access to the most competitive interest rates.

Which option is right for me?

This will depend on what you want to use the loan for and how much cash you require. When comparing the above options, it’s important to weigh up the pros and cons of each and make sure you factor in the fees.

Also consider whether you are happy receiving a fixed lump sum, or whether you would prefer the flexibility of a line of credit. If you’re planning home renovations for example, you might feel more comfortable knowing you can draw additional funds if required. In any case, we recommend that you get professional financial advice.