Equity Loan Guide: What You Need to Know
Thinking about pulling cash out of your house? An equity loan lets you borrow against the value you’ve built up, without selling. It can fund home improvements, pay off debt, or simply give you a financial safety net. But not every equity product works the same, and the wrong choice can bite you later.
How an Equity Loan Works
When you apply for an equity loan, the lender looks at two main numbers: the current market value of your property and the amount you still owe on your mortgage. They’ll usually let you borrow a percentage of the difference, often between 20% and 60% depending on your age, credit score, and the product type.
There are two popular routes:
- Lifetime mortgage (reverse mortgage): You don’t make monthly repayments. Interest rolls up and is repaid when you sell, move into care, or pass away.
- Home reversion: You sell a share of your house to a provider, keep living there, and get a lump sum now. You’ll get a smaller portion of any future sale price.
Both options protect you from immediate cash‑flow pressure, but they affect the equity you’ll have left later.
Choosing the Right Option
Start by asking yourself three questions:
- Do I need regular income or a one‑off lump sum? If you want steady money, a lifetime mortgage with monthly payouts might fit.
- How long do I plan to stay in the house? The longer you stay, the more interest can eat into the remaining equity.
- Am I comfortable giving up a slice of my home? Home reversion gives cash now but reduces your future sale proceeds.
Next, compare costs. Look at the loan‑to‑value (LTV) ratio, the interest rate (fixed vs variable), any arrangement fees, and early repayment penalties. A lower LTV usually means a better rate.
Finally, read the fine print. Some providers guarantee that the loan won’t exceed the property's value at repayment, while others don’t. Make sure you know whether the loan is protected against a drop in house prices.
Our recent articles break these points down further:
Bottom line: an equity loan can be a smart tool if you match the product to your needs, keep an eye on costs, and understand how it will affect your home’s future value. Grab a calculator, talk to a trusted adviser, and make sure the numbers add up before you sign.
