Home equity loan is a US term. In the UK the same idea, borrowing against the value you have built up in your home, comes in three forms: a remortgage, a further advance and a second charge mortgage. All three put your home at risk if you can't keep up the repayments, so it is worth understanding the differences before you compare anything else.
The UK equivalents
| Option | What it is | Main trade-off |
|---|---|---|
| Remortgage | Replace your whole mortgage with a larger one | You may pay an early repayment charge on your current deal, and the new rate applies to the whole balance |
| Further advance | Borrow more from your current lender | The lender has to agree, and the rate on the extra may differ from your main deal |
| Second charge mortgage | A separate loan secured behind your first mortgage, also called a secured loan or homeowner loan | Rates are usually higher than a first mortgage, and there are fees, but your existing deal stays in place |
Second charge mortgages have been regulated by the FCA since 2016, so lenders must carry out affordability checks.
A simple home equity loan calculator
A home equity loan calculator in the UK usually works like this: take your home's value, multiply by the most the lender will lend against it (the loan-to-value, or LTV), and subtract what you still owe.
For example, with a home worth £300,000, a lender capping total borrowing at 75% LTV, and an existing mortgage of £180,000: 75% of £300,000 is £225,000, less £180,000, leaves up to £45,000 you could borrow. This is an illustration, not an offer. Lenders set their own limits and also check your income and credit history.
Rates: what decides them and how to compare
Home equity loan interest rates, and the current home equity loan rates you may see advertised, change often and differ by lender, so a list of best home equity loan rates would be out of date quickly. What decides your rate is:
- LTV. The more you borrow against your home's value, the higher the rate tends to be
- Your credit history and income, which determine how risky you look
- The term, because longer loans cost more interest overall
- Fees, such as valuation, arrangement and broker costs
Compare the APRC, the annual percentage rate of charge, which includes fees, and the total amount you would repay. Home equity loan refinance rates in UK terms mean remortgage rates, and whether a remortgage or a second charge costs less depends on your current deal: leaving a cheap fixed rate can be expensive, while a remortgage can be cheaper when your current deal is poor. Ask a broker to compare all three on the same figures.
The risks
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. If you are using the money to clear credit cards or loans, remember that you are turning unsecured debt into debt secured on your home, and a longer term can mean paying more interest overall. If you are already struggling, free advice comes first; see our guides to the Debt Relief Order and other options and to negotiating a debt settlement yourself.
Steps before you borrow
- Get a realistic valuation and work out your equity.
- Check whether your current mortgage deal has an early repayment charge.
- Use an FCA-authorised mortgage broker, and confirm on the FCA Register that the firm covers second charge lending.
- Compare the APRC and total cost of each option.
- Test whether you could still afford the payments if your income fell or rates rose.