HELOC: Your Guide to Home Equity Lines of Credit in the UK

If you own a house and need cash, a Home Equity Line of Credit, or HELOC, might be on the table. Unlike a traditional loan that hands you a lump sum, a HELOC works like a credit card that’s tied to the equity in your home. You get a credit limit, draw money when you need it, and only pay interest on what you actually use.

How a HELOC Works

First, the lender checks how much of your property’s value is still free after the mortgage. That free part is called equity. Most banks let you borrow up to 80 % of that equity, but the exact limit depends on your credit score and income. Once approved, you’ll have a revolving credit line—usually for five to ten years—called the draw period. During this time you can pull funds, repay them, and pull again, just like topping up a prepaid card.

Interest on a HELOC is typically variable, meaning it can move up or down with the Bank of England base rate. Payments are usually interest‑only while you’re in the draw period, which keeps monthly costs low, but the balance can stay the same if you only pay interest. After the draw period ends, you enter the repayment phase, where you’ll need to start paying both principal and interest, often over 10‑15 years.

Because you only pay interest on the amount you’ve actually used, a HELOC can be cheaper than taking out a larger fixed‑rate loan for the same purpose. For example, if you need £20,000 for a kitchen remodel but expect to borrow another £10,000 later for a garden project, a HELOC lets you borrow the first £20,000, repay it, and then pull the next £10,000 without re‑applying.

When a HELOC Makes Sense

Use a HELOC for expenses that you can repay relatively quickly, like home improvements that add resale value, consolidating high‑interest credit‑card debt, or covering short‑term cash flow gaps in a business run from home. The flexibility is handy, but it also means discipline is key. If you only make interest payments and let the balance sit for years, you could end up owing a large sum when the repayment phase begins.

Check the fees before you sign. Some lenders charge an arrangement fee, annual maintenance fee, or early‑closure charge if you pay off the line before the term ends. Compare the APR, not just the headline rate, because fees can push the real cost higher.

One practical tip: treat your HELOC like a budget tool. Set a maximum draw amount you’re comfortable with, and schedule regular principal payments even while you’re still in the draw period. That way you chip away at the debt and avoid a big shock later.

If you’re unsure whether a HELOC is right for you, run the numbers. Take a recent example from our archive: a $60,000 home equity loan showed a monthly payment of about £300 at a 5 % fixed rate. With a HELOC, if you only draw £20,000 and pay interest‑only at a similar rate, your monthly cost could drop to around £80. The trade‑off is the variable rate risk, so keep an eye on market movements.

Finally, remember that a HELOC uses your house as collateral. Missing payments can put your home at risk, just like a mortgage. Keep your credit score healthy, maintain steady income, and only borrow what you can realistically pay back.

In short, a HELOC offers flexibility and potentially lower costs for the right situation. Do the math, read the fine print, and make sure you have a repayment plan in place. When used wisely, it can be a powerful tool in your personal finance toolbox.