If you are a UK homeowner looking to fund a major expense, such as a home renovation or private school fees, you may be considering borrowing against the equity in your property. This converts some of that equity into debt secured against your home.
If your existing mortgage has a competitive fixed rate or an early repayment charge, replacing it through a full remortgage may be expensive. However, remortgaging can still be suitable in some circumstances, so compare the interest rate, fees, early repayment charges and total amount repayable across all available options.
So, how can you borrow against your home without replacing your existing mortgage? Two possible options are a further advance from your current lender and a Home Equity Line of Credit, or HELOC, from a specialist lender. This article compares how they work, their costs and their respective risks.
Both options allow you to borrow against your property, but they work in fundamentally different ways. Let's break down the differences without the complex financial jargon, so you can decide which route is right for you.
What is a further advance? (the "ask your current lender" route)
A further advance is exactly what it sounds like: you are asking your current mortgage lender to advance you more money, secured against your property.
If your home has increased in value or you have reduced your mortgage balance, you may have sufficient equity to apply for additional borrowing. The lender will also assess your income, expenditure, credit history and ability to afford the repayments. The further advance is typically recorded as a separate part of your mortgage, usually with its own interest rate and potentially a different term.
The pros:
- Keep things in one place: you are dealing with the same bank or building society you already use.
- Potentially lower costs: a further advance may have a lower interest rate or fewer fees than a second-charge mortgage, but this is not guaranteed. Check the product fee, valuation costs, interest rate, APRC, repayment term and total amount repayable.
What is a HELOC? (the "flexible credit line" route)
A Home Equity Line of Credit (HELOC) is a flexible loan secured against your property. The Selina Finance HELOC is structured as a second-charge mortgage provided separately from your existing mortgage. It offers an approved credit limit from which funds can be drawn during an agreed flexible period. It has a variable interest rate, and product and arrangement fees apply.
For example, if approved for a £50,000 credit limit, you can draw, repay and redraw funds during a flexible period of between 2 and 5 years, subject to the product’s terms. Interest and monthly repayments apply only to the amount drawn. Additional drawdowns may be declined if your circumstances or requirements change and you no longer meet the lender’s criteria.
The pros:
- Flexible access: you can request funds up to your available credit limit during the agreed drawdown period, subject to the lender’s terms and criteria.
- Separate assessment: the application is assessed under the second-charge lender’s criteria rather than those of your existing mortgage provider. Affordability, credit and property requirements still apply.
The big differences: HELOC vs further advance
While both options protect your main mortgage rate, the way you access and pay for the money is very different. Here is how they stack up against each other:
1. The lump sum vs. flexible drawdown
A further advance will normally provide the agreed amount as a lump sum, with interest charged on the full amount advanced. A HELOC allows funds to be drawn in stages, with interest and monthly repayments based on the amount used. This may reduce interest charged during the drawdown period, but it does not necessarily make the HELOC cheaper overall. Compare its variable rate, fees, APRC, term and total amount repayable with those of the further advance.
2. Lender restrictions vs. freedom of choice
A further advance is available only from your existing mortgage provider and is subject to its current affordability, credit and lending criteria. A HELOC is assessed separately by a specialist lender under that lender’s own criteria. Neither route guarantees acceptance, and ‘more flexible’ should not be assumed to mean more suitable or less expensive.
3. Repayment flexibility
A further advance normally requires monthly capital-and-interest repayments, although its rate may be fixed or variable and early repayment charges may apply. With the Selina HELOC, monthly repayments are based on the amount drawn, and customers can currently overpay or repay early without an early repayment charge. These are features of the Selina product and should not be attributed to every HELOC.
Which one is right for you?
If you need a known lump sum and your existing lender offers competitive terms, a further advance may be worth considering. Before securing borrowing for a car or another depreciating asset against your home, compare unsecured lending and vehicle-finance options, which do not place your home directly at risk.”
If your costs arise in stages, for example, during a phased renovation or across several school terms, the drawdown structure of a HELOC may be useful. Whether it is suitable will depend on the amount and timing of the borrowing, the variable interest rate, fees, repayment term, affordability and available alternatives. The ability to draw funds in stages can help align borrowing with expenditure. However, interest rates may rise, fees apply, further drawdowns are subject to the lender’s terms, and borrowing over a long period may increase the total amount repaid.
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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.
