In a tough cost of living crisis, many Britons are sitting on very large wealth reserves. Real estate agent Savills said UK homes totaled £8.7tn by the end of last year, while outstanding mortgage debt stood at just £1.7tn, according to Bank of England data. . In other words, ostensibly cash-strapped Britons actually own around £7 trillion in housing wealth.
Selina Finance, a new entrant to the UK mortgage market, says its innovative loans will help free up some of that cash so Britons can pay for home improvements, new cars, school and more. or simply alleviate the current financial pressures. face. The company has made more than £200m of his loan since being licensed by the Financial Conduct Authority in early 2021, but company founder Hubert Fenwick said Serena will be “in the next five years. , he thinks he can keep doubling the loan amount every year.
Selina offers a mortgage product known as the “Home Equity Credit Line” (HELOC for short). The idea is to give borrowers access to a loan facility that they can borrow against their property as collateral and withdraw when they need the cash, usually for up to five years, in addition to their original mortgage. For example, say you own a house worth £500,000 and have a remaining mortgage debt of £250,000. You can then apply for £50,000 from Selina for her HELOC and withdraw additional cash over the course of months or years.
“It’s a matter of flexibility and liquidity,” Fenwick explains, noting that once the HELOC is in place, you can receive the money when you need it. “In the UK, a lot of people’s wealth is tied up in residential property, and that money is very hard to come by, even when you really need it.”
The cash may be used for whatever purpose the borrower deems appropriate and may be received in installments or in lump sums. In that sense, HELOC is like a credit card, offering flexible funds to help people manage their finances and fund his one-time purchases that matter. However, because loans are secured by real estate, they are generally cheaper than borrowing with a credit card. It is also possible to borrow more than most credit card providers are comfortable with.
Today, Selina’s fees start at around 8% p.a., and regular credit cards are often 20% or more, so we’ve significantly reduced our standard credit card rates. Even factoring in credit card provider referral deals, Selina’s fees are a third cheaper than his on any new credit card currently available, according to Personal Financial Data Monitor Moneyfacts. A borrower pays an arrangement fee of £995 to set up her HELOC facility, which is roughly in line with the fees charged by traditional mortgage providers.
However, borrowers should be careful. A HELOC default is to be repaid over the life of the mortgage. This could mean paying off his 8% or more of the debt for 25 years or more. In that case, the interest would add up to a considerable amount. Also, since the interest rate is a floating rate, it can be even higher. It’s also important to realize that, like a mortgage, this is a debt backed by real estate, so it’s at risk if the borrower defaults on payments.
In practice, most borrowers choose to pay off their HELOCs in full when they refinance their mortgages, Fenwick said. For example, when the borrower’s two-year fixed rate contract ends, they remortgage to the best available contract at the time and borrow some more to pay off Selina’s debt.
Selina offers loans between £10,000 and £1 million to homeowners with assets between £100,000 and £10 million and incomes of £22,500 or more. We cap loans so that a borrower’s total debt, including both mortgages and HELOCs, does not exceed 85% of his property value. In fact, according to Fenwick, the average Serena borrower has a loan worth about 60%.
Fenwick believes that HELOC has great potential in the UK, just as it is very widely used in markets such as the US, Canada and Australia. “We need to educate consumers about these products as awareness is fairly low in the UK,” he says. “But I think we can reach a stage where everyone understands how HELOC works and when it’s the right product. It could become as ubiquitous as credit cards. I have.”
It’s a challenge. The UK mortgage market has long been dominated by a handful of large banks and housing associations. And innovators have struggled to gain momentum after trying to disrupt the market in recent years with products like checking accounts and offsetting mortgages.
There was also an element of stigma, especially with regard to home equity products. A scandal in the 1990s saw an elderly borrower sell an improper loan deal, leaving them and their families facing hefty bills.
Still, independent mortgage experts believe HELOCs have a role to play in the UK market. David Hollingworth, Associate Director of L&C Mortgages said: It’s like an offset mortgage product. “
Serena is backed by funders such as Goldman Sachs, with an investment bank providing £250m of lending capacity. We are working on plans to securitize later this year, which will allow us to sell loans already made in bulk, freeing up more funds for upfront payments.
“Our main goal is to make HELOCs an easily accessible home product for all UK homeowners,” Fenwick insists. “Home equity is incredibly underutilized in the UK, which is a huge loss for UK homeowners.”