HELOC: Home Equity Line of Credit in the UK

A HELOC is a revolving credit facility secured by a legal charge on your home, with a credit limit set at the outset, a draw period during which the limit can be used and reused, and a repayment period during which whatever has been drawn is repaid. Two ideas sit behind it.

Home equity

Equity is the part of the property's value you own outright: the value less the mortgage and any other debt secured on it.

Lenders do not lend against all of the equity. They lend up to a maximum combined loan-to-value, meaning all secured borrowing on the property, including the new facility, as a percentage of its value, which for the facility on this page is 85%.

A line of credit

A line of credit is a limit you can dip into and pay back at will; the funds stay with the lender until you draw them, so interest runs only on what has been drawn. Credit cards and overdrafts work the same way. A HELOC applies that structure to borrowing secured on a home, which is what allows a far larger limit and a longer term than unsecured credit, and what puts the home at risk if the borrowing is not repaid.

Where a HELOC sits legally

A HELOC on your own home is a regulated mortgage contract. Since March 2016, second charge mortgages on owner-occupied homes have been regulated under the Financial Conduct Authority's MCOB rules, with the same affordability, advice and disclosure requirements as a first charge mortgage. The HELOC lender registers its charge behind the first charge lender's, which means the first charge lender is repaid first on a sale or repossession and the HELOC lender second.

A HELOC runs in two phases, and the borrower chooses the length of the first.

There is no minimum utilisation: a borrower can complete the facility and draw nothing until the money is needed, and the product fee can be added to the facility rather than paid upfront. A balance repaid to zero during the draw period does not close the facility; it remains available until the draw period ends. At that point any balance outstanding converts to standard monthly repayments, and if nothing is owed, nothing more is payable.

How the pricing is built: the interest rate on the HELOC described here is variable for the life of the facility, so payments rise and fall with it; there is no fixed-rate period. The one-off cost is the product fee, set as a percentage of the credit limit and rising with the length of the draw period (2.0% for two years, 2.2% for three, 2.4% for four and 2.6% for five, capped at £9,995), paid upfront or added to the facility. Because the fee is charged on the limit, not on what is drawn, the limit is sized to the realistic need rather than set at the maximum available. Second charge pricing sits above first charge pricing at the same loan-to-value, so a HELOC is compared with a remortgage and a further advance on total cost, not on rate alone.

Thinking about a HELOC? Get in touch with your property value, your mortgage balance and what the money is for: whether a credit line, a lump-sum second charge or a remortgage is the cheaper route turns on all three.

Adverse credit, in summary. County Court judgments and defaults that are satisfied, or under £500, are ignored; unsatisfied ones are accepted only in limited numbers and where the debt is cleared from the facility at completion. The existing mortgage must be up to date with no missed payments in the last 12 months. Other arrears are accepted up to two missed payments in 12 months across all credit, or ignored where the debts are consolidated. A debt management plan is accepted where it has run for 12 months with no missed payments and is being consolidated. Bankruptcy and individual voluntary arrangements are accepted once satisfied for 36 months; unsatisfied ones are not. One payday loan in the last 12 months is accepted. A previous repossession is not. Telecoms, utility and mail-order accounts are excluded from the arrears and default tests. The lender's full credit policy applies to each case.

The credit limit is the smallest of three figures: the equity up to 85% combined loan-to-value, the cap for the loan-to-value band the limit falls in, and what your income supports when the full limit is tested as drawn.

Example 1: a £400,000 home with a £200,000 mortgage. At 85% combined loan-to-value the maximum secured borrowing is £340,000, leaving a maximum limit of £140,000; at 75% it is £100,000. Both are within the band caps.

Example 2: a £650,000 home with a £150,000 mortgage. At 75% the headroom is £337,500, within the £500,000 cap for that band. At 85% the headroom would be £402,500, but any limit taking the combined loan-to-value above 75% is capped at £300,000, so the maximum is the 75% figure: £337,500.

Example 3: a mortgage-free £300,000 home. At 85% the maximum limit is £255,000, within the £300,000 cap for the upper band.

Then the income test. Borrowing is limited to 6.5 times income, and the affordability assessment tests the repayment on the full limit; a £60,000 income supports up to £390,000 of borrowing on that multiple before the affordability model is applied.

Illustrative figures; the lender's valuation, affordability model and credit assessment decide the actual limit. Not an offer of finance.

The facility suits any cost that arrives in stages or cannot be priced in advance, and is accepted for a wider range of purposes than many guides suggest.

Home improvements

Renovation costs are hard to estimate and are paid in stages, which is where a lump-sum loan goes wrong in both directions: borrow too much and pay interest on money that sits unused, borrow too little and return for more. A HELOC limit set at the realistic upper estimate is drawn as invoices arrive, and interest runs only on what has been spent.

Get in touch with the build estimate and the timeline.

Debt consolidation

A HELOC can clear credit cards, loans and car finance into one secured facility, and some adverse credit is accepted only where the affected debts are cleared at completion. Consolidation converts unsecured debt into debt secured on the home, and spreading it over a longer term can increase the total interest paid even where the rate is lower; it is compared against the cost of the existing debts left where they are.

Get in touch with a list of the debts, balances and payments.

School and university fees

Fees fall due termly over years, which is the pattern a draw period is built for: each term's fees are drawn when invoiced, rather than the whole course being borrowed on day one. A five-year draw period covers most secondary or university courses.

Get in touch with the fee schedule and the years it runs.

A deposit for a buy to let purchase

The facility on this page accepts buy to let purchases as a purpose, so a landlord can draw a deposit from the equity in their own home and fund the rest with a buy to let mortgage; the new mortgage is assessed on its own rental criteria. The mechanics are in the buy to let mortgage guide.

Get in touch with the purchase and your home's value and mortgage.

A business credit facility

A business credit facility is an accepted purpose, letting a company director or sole trader hold a standby limit secured on their home and draw it for working capital or an opportunity as it arises. The facility is secured on the borrower's home whatever the money is used for, which is the risk to weigh against unsecured or asset-based business finance.

Get in touch with what the facility is for and your business accounts.

An alternative to bridging

Where short-term funds are needed, to buy before a sale completes or to complete a purchase while other money is tied up, a HELOC drawn and repaid within the draw period can do the work of a bridging loan at a lower monthly cost, with no early repayment charge on repayment. Where speed or the size of the sum rules a HELOC out, our bridging loans page covers the alternative.

Get in touch with the amount, the timing and the exit.

Weddings, holidays and major purchases

Large personal costs can be funded from the limit as they fall due. Because the facility is secured on the home and can run for decades, borrowing for consumption is weighed against the term over which it will be repaid.

Get in touch with the cost and how quickly you intend to repay it.

Self-employed borrowers, contractors and landlords

Self-employed income is accepted from sole traders' net profit and company directors' salary and dividends, contractors are assessed on an annualised day rate, and rental income is counted at 90%. The contractor mechanics are on our contractor mortgages page.

Get in touch with your accounts, contracts or rental figures.

Borrowers on maternity leave

A borrower on maternity leave is assessed on the salary they return to, not their reduced leave pay, where the return date and salary are confirmed.

Get in touch with your employer's confirmation of the return date and salary.

The deciding question is usually the existing mortgage. A borrower on a low fixed rate with years left to run, or facing an early repayment charge, protects that rate by borrowing on a second charge; a borrower whose deal is ending may release equity more cheaply by remortgaging the whole balance. Our second charge mortgages page covers the lump-sum route.

Two costs and three risks. The costs are the product fee, charged once on the credit limit and added to the facility or paid upfront, and the interest, variable and charged on the balance drawn; there are no ongoing account fees. The risks are rate, discipline and security. A variable rate can rise for the life of the facility, and a balance that is affordable today is tested by the lender at full utilisation for that reason. A revolving limit makes it easy to keep borrowing, and every drawing during the draw period becomes a balance to be repaid with interest over the remaining term. And the facility is secured on the home: if repayments are not kept up, the lender can take possession of the property, after the first charge lender is repaid from the proceeds.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

1. The numbers. Property value, mortgage balance and any other secured debt; what the money is for and when it will be needed; income and commitments; credit history; the terms of the first charge mortgage, including any consent requirement.
2. The route. A HELOC compared with a lump-sum second charge loan, a further advance and a remortgage on total cost; the credit limit and the draw period chosen to match the spending pattern.
3. Application and underwriting. Affordability tested on the full limit; the lender's valuation; first charge consent requested where the mortgage terms require it.
4. Offer and completion. The legal charge registered behind the first charge; the facility opened; funds drawn as needed.

A HELOC is cheaper than a lump sum only where the money is drawn later or repaid sooner; the arithmetic shows when.

Step 1. Interest on what is drawn, not on the limit

A £100,000 limit at an illustrative 8% variable rate:

A renovation drawn £20,000 at a time over two years costs a fraction of the interest of borrowing £100,000 on day one, which is the core of the case for a HELOC.

Each extra year of draw period costs 0.2% of the limit; a borrower who will finish drawing in two years does not need five. The cap affects only the largest limits.

Step 3. The affordability test at full utilisation

The lender assumes the whole limit is drawn at the end of the draw period. On a £100,000 limit, at the illustrative 8%, repaid over 25 years, the tested repayment is £771.82 a month, even if the borrower expects to draw £20,000. The limit the borrower can obtain is the one whose full repayment their income supports, which is why the limit is sized to need, not to the maximum.

Illustrative capacity arithmetic; the lender's affordability model applies its own rates and rules.

Step 4. The existing mortgage

A borrower with a £200,000 mortgage fixed for three more years, and an early repayment charge on leaving, who needs £60,000 for a staged renovation, can remortgage the whole £260,000, paying the early repayment charge and repricing the £200,000, or leave the mortgage alone and draw the £60,000 on a HELOC as invoices arrive. The comparison is the remortgage's early repayment charge and any rate increase on £200,000, against the HELOC fee and its higher rate on the drawn balance only.

What decides the case

The equity and the income set the ceiling; the spending pattern, the existing mortgage and the borrower's discipline decide whether a HELOC is the right structure. Run the drawn-balance interest, the fee for the draw period actually needed, and the remortgage comparison before applying.