Amid a punitive cost-of-living crisis, many Britons are sitting on a remarkably large hoard of wealth – if only they could get to it. According to real estate agent Savills, the total value of homes in the UK was £8.7 trillion at the end of last year, but data from the Bank of England shows outstanding mortgage debt was just £1.7 trillion. In other words, apparently poor Britons actually own around £7 trillion in home ownership.
Selina Finance, a new entrant to the UK mortgage market, believes its innovative loans could help free up some of that money, enabling Britons to pay for home improvements, say a new car or school fees, or simply to ease the financial strain. relieve that they currently have. sight. Since gaining approval from the Financial Conduct Authority in early 2021, it has borrowed more than £200 million, but Hubert Fenwick, the company’s founder, thinks Selina “could continue to double its loans every year for the next five years”.
Selina offers a home loan product known as a “home equity line of credit” – or HELOC for short. The idea is to give borrowers access to a financing facility — usually for up to five years — where they can draw money from as and when they need money, with the loan backed by their property, on top of their original mortgage. For example, you could have a house valued at £500,000 and have a mortgage debt of £250,000; you could then apply for a HELOC from Selina for £50,000, and withdraw the extra money over a period of months or years.
“This is about flexibility and liquidity,” explains Fenwick, pointing out that once your HELOC facility is arranged, you can withdraw the money when you need it. “In the UK, so much of people’s wealth is tied up in housing, and it’s very hard to get that money, even when you really need it.”
The money can be used for any purpose borrowers see fit – and can be withdrawn in instalments, or as a lump sum. In this sense, a HELOC is like a credit card, providing flexible financing that allows people to manage their finances and fund significant one-time purchases. But since the loan is secured by a property, it is usually cheaper than borrowing with a credit card. It is also possible to borrow more than most credit card providers are comfortable with.
Currently, Selina’s rates start at about 8% per annum, which is significantly lower than standard credit card rates as they are often 20% or more. Even factoring in introductory deals from credit card providers, Selina’s rates are cheaper than a third of the new credit cards currently available, according to personal finance data monitor Moneyfacts. Borrowers do pay a £995 arrangement fee to set up their HELOC facility, although this broadly matches the fees charged by traditional mortgage lenders.
Still, borrowers will have to be careful. The default setting for the HELOC is that it is repaid over the full term of the mortgage – that could mean paying 8% or more on the debt over 25 years or even longer. In that case, interest charges would add up to a significant amount – and the rate is variable, so could run higher. It is also important to recognize that, like a mortgage, this is a debt secured by the property, which is therefore at risk if the borrower defaults on payments.
In practice, says Fenwick, most borrowers choose to pay back their HELOCs in full when they refinance their mortgages. For example, when the borrower’s two-year fixed rate agreement expires, they re-mortgage the best deal available at the time, borrowing a little more to pay what they owe Selina.
Selina offers loans of between £10,000 and £1 million to homeowners with properties ranging in value from £100,000 to £10 million, and with an income of at least £22,500 a year. It restricts lending so that the borrower’s total debt — including both the outstanding mortgage and the HELOC — cannot exceed 85% of the property’s value. In practice, Fenwick explains, the average Selina borrower has a loan-to-value of about 60%.
Fenwick believes that HELOCs have a great future in the UK, as they are widely used in markets such as the US, Canada and Australia. “We need to educate consumers about these products because awareness is quite low in the UK,” he says. “But I think we can get to a stage where everyone understands how a HELOC works and when it can be the right product – it can become as ubiquitous as a credit card.”
That will be a challenge. The UK mortgage market has long been dominated by a handful of the largest banks and building societies. And while innovators have made an effort to disrupt the market in recent years, with products such as checking account and savings mortgages, they’re struggling to gain traction.
There’s also an element of stigma around home equity products in particular – scandals in the 1990s saw older borrowers sell improper loan deals that left them and their families with huge bills.
Still, independent mortgage specialists believe HELOCs could play a role in the UK market. David Hollingworth, Associate Director of L&C Mortgages, says: “The appeal could be to have the flexible line of credit while avoiding the need to pay interest on funds that may not be needed immediately, although those who prefer a standard mortgage may might consider something like a matched mortgage product.”
And Selina has the backing of financiers such as Goldman Sachs, with the investment bank providing £250 million in lending capacity. It is working on plans for a securitization later this year that would allow it to package and sell loans already issued, freeing up more money for advances.
“Our primary aim is to make HELOCs a household product that is easily accessible to all homeowners in the UK,” emphasizes Fenwick. “There is incredible under-utilization of UK home equity and therefore a huge loss to UK homeowners.”
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