Equity Loans
Looking to apply for a great Equity loan deal? Or maybe you just need some more
information on the subject. In both cases, you've come to the right place.
What are Home Equity Loans?
Home Equity loans are becoming an increasingly popular method of raising capital funds
for people who own their home, regardless of whether there is an outstanding
mortgage on the property or not. An equity loan is a relatively cheap and easy
method for borrowers to release the money which is tied up in the value of their home.
In recent years, property values in the UK have increased dramatically. If
someone bought a house ten or fifteen years ago via a mortgage, they may
well find that the value of their home has increased to double or treble
the amount that they bought it for originally, possibly even more, whilst
the balance of the mortgage has actually reduced. These are the type of
people for whom an equity loan is ideal as they have a low loan to value
ratio (i.e. mortgage balance to overall property value). In contrast, a
first time buyer who has only recently purchased their home, is likely to
have borrowed heavily against the property and could well have a loan to
value ratio of 95% or more. Indeed, some lenders will even lend up to 125%
loan to value to first time buyers. This type of homeowner has not had the
benefit of the years of property growth enjoyed in the first example and
clearly an equity loan would not be suitable for someone in this position.
Understanding Equity
Equity is the difference between the outstanding mortgage balance on a property
and the overall value. For example, if someone owns a house which is valued at
£200,000 and they have a mortgage balance of £100,000, then the equity they have
in their home is £100,000. This amount of equity is often the largest asset an
individual may own, but they are unable to take advantage of this because the
value is locked into their home.
The Benefits of an Equity loan
An equity loan allows an individual to release this tied up value by securing
the loan on the equity portion of the property. The lender would then take a legal
charge over the property which would rank in second place behind the interests of
the main mortgage provider. A borrower should always contact their mortgage provider
before taking out an equity loan, as some providers do not allow second charges
to be made on the same property. The mortgage lender may also be able to provide
an alternative solution to an equity loan, in the form of a further advance or a
remortgage, which could work out as a cheaper option. It is important for the
borrower to thoroughly investigate all the various methods of releasing equity
before they commit to any one course of action.
Anyone who is contemplating taking out an equity loan, in whatever form this
may take, should carefully assess whether they need to take this course of
action, as although it is nice to have a lump sum of money today, this has
to be repaid to the lender, usually over a long number of years and a potential
borrower should ensure that these repayments are affordable, not only now,
but also in several years time. Before you take out any loan which is secured
on your property, you should bear in mind that: your home is at risk if you
do not keep up repayments on a mortgage or other loan secured on it.
How can home equity loans be used?
As with other types of loan, an equity loan can be used for essentially any
purpose that the borrower so desires. Recent studies suggest that the vast
majority of equity loan borrowers tend to re-invest the released capital
back into their homes using the funds for major home improvement projects.
Typical examples of this could include: -
- Loft conversions
- Extensions to the property such as a new conservatory or garage
- Garden landscaping and patios
- New driveways
- Kitchen, bathroom and spare room remodelling
Using the loan to fund projects such as the above can prove to be extremely
beneficial for the borrower if and when they decide to sell their home.
Providing the work is executed in a professional manner, certain home
improvements can boost the value of the property by a substantial margin.
However, it is also of paramount importance for any consumer who wishes
to use their equity loan for this purpose, to consult a professional
surveyor before any work is undertaken.
