Amid a punishing cost of living crisis, many Britons are sitting on a remarkably large store of wealth – if only they could get at it. The total value of homes in the UK was £8.7 trillion by the end of last year according to estate agent Savills, but Bank of England data shows that outstanding mortgage debt came to only £1.7 trillion. In other words, ostensibly cash-strapped Britons actually own around £7 trillion of housing wealth.
Selina Finance, a new entrant to the UK’s mortgage market, thinks its innovative loans can help unlock some of that cash, enabling Britons to pay for home improvements, a new car or school fees, say, or simply to ease the financial pressures they currently face. Since receiving authorisation from the Financial Conduct Authority in early 2021, it has lent more than £200 million, but Hubert Fenwick, the company’s founder, thinks Selina can “keep doubling its lending each 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 – typically for up to five years – that they can draw down on as and when they need cash, with borrowing secured against their property, on top of their original mortgage. You might own a house valued at £500,000, say, and have £250,000 of mortgage debt outstanding; you might then apply for a HELOC from Selina for £50,000, drawing down the additional cash 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 take the money when you need it. “In the UK, so much of people’s wealth is tied up in residential property, and it’s very difficult to get at that money, even when you really need it.”
The cash can be used for any purpose borrowers see fit – and can be taken in chunks or as a lump sum. In that sense, a HELOC is like a credit card, providing flexible funding that can help people manage their finances and fund significant one-off purchases. But since the loan is secured against a property, it is typically cheaper than credit card borrowing. It’s also possible to borrow more than most credit card providers feel comfortable with.
Right now, Selina’s rates start at around 8% a year, undercutting standard credit card rates significantly, since these are often 20% or more. Even taking into account credit card providers’ introductory deals, Selina’s rates work out cheaper than a third of new credit cards currently available according to personal finance data monitor Moneyfacts. Borrowers do pay an arrangement fee of £995 to set up their HELOC facility, though this is broadly in line with fees charged by traditional mortgage providers.
Nevertheless, borrowers will need to be careful. The default for the HELOC is for it to be repaid over the full mortgage term – that could mean paying 8% or more on the debt for 25 years, or even longer. In which case, interest charges would add up to a considerable sum – and the rate is a variable one, so could rise higher. It’s also important to recognise that just like a mortgage, this is debt that is secured against the property, which will therefore be at risk if the borrower defaults on payments.
In practice, Fenwick says, most borrowers choose to repay their HELOCs in full when they refinance their mortgages. When the borrower’s two-year fixed-rate deal comes to an end, say, they remortgage on to the best deal available at the time, borrowing a little more in order to pay what they owe Selina.
Selina offers loans of between £10,000 and £1 million to homeowners who have properties ranging in value from £100,000 to £10 million, and with incomes of at least £22,500 a year. It caps lending so that the borrower’s total debt – including both outstanding mortgage and HELOC – can be no higher than 85% of the value of the property. In practice, Fenwick explains, the average Selina borrower has a loan to value of around 60%.
Fenwick is convinced that HELOCs have a big future in the UK – just as they are very widely used in markets such as the US, Canada and Australia. “We need to educate the consumer about these products, because awareness in the UK is pretty low,” he says. “But I think we can get to a stage where everyone understands how a HELOC works and when it might be the right product – it can become as ubiquitous as a credit card.”
That will be a challenge. The UK’s mortgage market has long been dominated by a handful of the largest banks and building societies. And while innovators have made efforts to disrupt the market in recent years, with products such as current account and offset mortgages, they’ve struggled to gain traction.
There has also been an element of stigma around home equity products in particular – scandals in the 1990s saw older borrowers sold inappropriate loan deals that left them and their families facing huge bills.
Still, independent mortgage specialists think HELOCs could have a role to play 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 immediately required, although those that prefer to use a standard mortgage could consider something like an offset mortgage product.”
And Selina does have the backing of funders such as Goldman Sachs, with the investment bank having provided £250 million of lending capacity. It is working on plans for a securitisation later this year – enabling it to package up and sell loans already made – which will free up further funds for advances.
“Our primary goal is to make HELOCs a household product that is easily accessible for all UK homeowners,” Fenwick insists. “There is an incredible under-utilisation of home equity in the UK and therefore a huge loss for UK homeowners.”
