A home equity loan and a HELOC (home equity line of credit) are both ways to borrow against the equity in your property, but they work differently. A home equity loan, known in the UK as a second charge mortgage, provides a lump sum at completion. A HELOC provides a revolving credit facility where you draw funds as you need them over a set period. Both are secured against the home, and both carry the same fundamental risk: the property can be repossessed if repayments are not maintained.

This guide compares the two products side by side, covering how each works in the UK market, what each typically costs, and which situations tend to favour one structure over the other. The difference is not about which product is better in the abstract. It is about which structure matches a specific borrowing need. All rate and cost figures used in this guide are illustrative only and do not represent a specific lender offer.

What is a home equity loan?

In the UK, a home equity loan is most commonly known as a second charge mortgage. It is a secured loan taken out against a property that already has an existing mortgage. The borrower receives the full loan amount as a lump sum at completion, and repayments of capital plus interest begin immediately on the entire balance.

The key characteristics of a home equity loan are predictability and simplicity. The borrower knows exactly how much will be received, what the monthly payment will be, and how long the repayment will take. Rates can be fixed (locked for a set period, typically two to five years) or variable (moving with the lender’s standard variable rate or the Bank of England base rate). Fixed rates provide certainty on monthly costs; variable rates may start lower but can change over the term.

Second charge mortgages are widely available in the UK from a broad range of lenders, including specialist secured loan providers and some high-street names. They are typically used for one-off borrowing needs such as home improvements, debt consolidation, or large purchases where the full amount is needed upfront. The guide to what are secured loans covers the broader product category in detail.

What is a HELOC?

A HELOC (home equity line of credit) is a revolving credit facility secured against the borrower’s property. Rather than receiving a lump sum, the borrower is approved for a credit limit and can draw from it as needed during a set draw period, which in the UK typically lasts two to five years. Funds can be drawn, repaid, and redrawn within that period, and interest-only payments are calculated on the drawn balance rather than the full facility limit.

Once the draw period ends, the HELOC transitions into a repayment period where the outstanding balance is repaid with capital-plus-interest payments over the remaining term. The total term, draw period plus repayment period, is typically between five and thirty years. Most UK HELOCs carry variable rates, though some lenders offer fixed-rate options for part or all of the facility.

HELOCs are relatively new to the UK market and are not available from high-street banks. The market has very few providers compared with the well-established second charge mortgage sector, and borrowers typically access HELOCs through a broker. The guide to what is a HELOC covers the product mechanics, the UK market landscape, and the differences from US HELOC products in full.

Side-by-side comparison

The table below sets out the main structural differences between a home equity loan (second charge mortgage) and a HELOC in the UK market. Both products are secured against the property and require a valuation, an affordability assessment, and a credit check. The differences are in how funds are delivered, how interest is charged, and how much flexibility the borrower has during the term.

The fee figures in the table above are illustrative and were typical at the time of writing. Fees vary between lenders and products, and the specific amounts will be confirmed during the application process. The guide to HELOC fees and costs covers the fee categories in detail, and the guide to secured loan fees explained covers second charge mortgage fees.

Borrowers accessing a HELOC through a broker should be aware that broker fees are charged separately from the lender fees shown in the table. Broker fees vary but can range from around 5% to over 10% of the facility amount. The total cost of the product, including both lender and broker fees, should be compared when assessing value.

When a lump-sum loan tends to be the better fit

A standard second charge mortgage tends to work well in situations where the borrower knows exactly how much is needed and needs it all at once. Paying for a single home improvement project with a fixed quote, clearing a defined set of debts, covering a tax liability, or funding a one-off large purchase are all situations where the full amount is required at completion and there is no advantage to drawing in stages.

Lump-sum loans also tend to be the more cost-effective choice when rate certainty matters. Fixed-rate second charge mortgages are widely available, allowing the borrower to lock in a rate for two, three, or five years. Fixed-rate HELOCs are less common in the UK market, and where they are available the fixed period may be shorter or the rate may be higher. For borrowers who want to know exactly what their monthly payment will be for the next several years, a fixed-rate second charge mortgage is typically more straightforward.

From a fee perspective, second charge mortgages generally carry lower upfront costs as a percentage of the loan amount. While both products involve valuation and legal costs, the product and arrangement fees on HELOCs tend to be higher. For a borrower drawing the full facility on day one, the combination of a higher fee and a similar or slightly higher rate makes the HELOC the more expensive option overall.

When a HELOC tends to be the better fit

A HELOC tends to work well in situations where funds are needed over a period of months or years rather than all at once. The most common example is a phased home improvement project where the builder is paid at each stage of the work. Rather than borrowing the full project cost on day one and paying interest on the entire amount while the builder works through the early stages, a HELOC allows the borrower to draw as each invoice is due. The interest saving from carrying a lower balance in the early months can be significant on larger projects. The guide to using a HELOC for home improvements covers this in detail.

School fees are another situation where the revolving structure aligns naturally with the spending pattern. Fees are typically paid termly over several years, and a HELOC allows the borrower to draw each term’s fees as they fall due rather than borrowing the full multi-year amount upfront. The guide to using a HELOC for school fees includes an illustrative worked example.

A contingency facility is a less obvious but practical use case. A HELOC can be approved and left undrawn, providing a financial safety net with no interest cost until it is actually used. This is something a lump-sum loan cannot replicate: with a second charge mortgage, interest begins accruing from the day the funds are released whether they are needed immediately or not.

The absence of early repayment charges on UK HELOC products currently available is also an advantage for borrowers who expect to repay ahead of schedule. Standard second charge mortgages may carry early repayment charges during a fixed-rate period, which can add significant cost if the borrower’s plans change.

Cost comparison: two worked scenarios

The question of which product costs less cannot be answered in the abstract. It depends on how much of the borrowing is needed on day one versus drawn over time. The two scenarios below illustrate this using the same total borrowing amount but different drawdown patterns. All figures are illustrative and do not represent a specific lender offer.

In Scenario A, where the full £40,000 is needed immediately, the lump-sum loan produces lower total interest because the rate is lower and the borrower gains no benefit from the HELOC’s staged drawdown feature. The HELOC’s higher fees would increase the gap further once included. For borrowers in this position, a standard second charge mortgage is typically the more cost-effective route.

In Scenario B, the picture reverses. The HELOC borrower pays interest on £10,000 for the first three months, £25,000 for months four to seven, and £40,000 only from month eight onward. The lump-sum borrower pays interest on £40,000 for the entire year. Even though the HELOC rate is higher in this example, the total interest is materially lower because the average balance carried through the year is smaller. For borrowers with a staged spending pattern, the interest saving from a HELOC can outweigh both the rate premium and the higher fees, though the exact breakeven depends on the specific drawdown schedule and the rate difference between the two products.

This is why the choice between the two products is not a question of which is cheaper in the abstract. It depends on the drawdown pattern. The guide to HELOC rates in the UK covers the rate landscape in more detail.

Risks that apply to both

Both products are secured against the property. If repayments are not maintained on either a home equity loan or a HELOC, the lender may apply to repossess the property. This is the fundamental risk of secured borrowing and applies equally to both structures. The guide to the risks of secured loans covers this in detail.

Both products carry interest rate risk if the rate is variable. A rise in the Bank of England base rate can increase monthly payments on either product. Fixed-rate options exist for both, though they are more widely available and more competitively priced for standard second charge mortgages than for HELOCs. Both products also require a property valuation, an affordability assessment, and a credit check, and both are registered on the credit file as secured lending.

The HELOC carries one additional risk that does not apply to a lump-sum loan: the behavioural risk of redrawing. Because the facility allows the borrower to repay and then draw again during the draw period, there is a temptation to treat the facility as permanent access to funds. This is particularly relevant for borrowers using a HELOC for debt consolidation. If debts are cleared with the HELOC and then the facility is redrawn for other purposes, the borrower ends up with new secured debt without having reduced their overall borrowing. A lump-sum loan does not have this feature: once the money is spent, there is no mechanism to reborrow. The guide to HELOC risks explained covers this and other HELOC-specific risks.

Frequently asked questions

Can I switch from a home equity loan to a HELOC, or the other way around?

Not mid-term. A home equity loan and a HELOC are separate products with separate agreements. Switching from one to the other would mean refinancing: applying for a new product to replace the existing one. This is possible at any time, but early repayment charges on the existing product may apply, particularly if it is within a fixed-rate period. The costs of the new application, including valuation and legal fees, would also need to be factored in.

The most practical time to consider switching is when any fixed-rate period on the existing product has ended and no early repayment charges apply. At that point, the borrower can assess whether the current product structure still matches their needs and whether an alternative would be more cost-effective. The guide to refinancing a HELOC covers the options available when circumstances change.

Which product has lower interest rates?

Standard second charge mortgages tend to carry slightly lower headline rates than HELOCs, partly because fixed-rate pricing is more competitive in the well-established second charge market and partly because the revolving structure of a HELOC introduces additional risk for the lender. However, the headline rate is only part of the total cost picture.

Total interest paid depends on the balance the interest is calculated on, not just the rate. A lower rate applied to a larger balance from day one can produce more total interest than a slightly higher rate applied to a smaller, gradually increasing balance. This is why the drawdown pattern matters more than the rate comparison in isolation. The worked scenarios in this guide illustrate this point. The guide to HELOC rates in the UK covers the rate landscape for HELOCs specifically.

Can I get either product with bad credit?

Yes, both home equity loans and HELOCs are available from specialist lenders for borrowers with adverse credit histories, including missed payments, defaults, and county court judgements (CCJs). The rate offered will be higher than for borrowers with clean credit files, reflecting the additional risk to the lender, and the maximum loan-to-value may be lower.

The key factor for both products is the equity in the property. Secured lending is inherently less risky for the lender than unsecured lending because the property provides security, which means borrowers with adverse credit but significant equity may have more options than they expect. The guide to getting a HELOC with bad credit covers the HELOC-specific position, and the guide to secured loans for bad credit covers lump-sum second charge mortgages.

Do both products affect my credit score in the same way?

Yes, broadly. Both products are registered on the credit file as secured lending. Applying for either will involve a hard credit search, which is visible on the credit file and may temporarily reduce the credit score by a small amount. Once the product is in place, the ongoing effect depends entirely on repayment behaviour: making payments on time and in full will build the credit record over time, while missed or late payments will damage it.

One difference is that a HELOC, as a revolving facility, may affect the credit utilisation ratio (the proportion of available credit that is in use), which is one factor credit reference agencies use when calculating scores. A lump-sum loan has a fixed declining balance, which behaves differently in credit scoring models. The practical impact of this difference is small for most borrowers. The guide to how secured loans affect your credit score covers the broader picture.

Which is faster to arrange?

The application and underwriting timelines are broadly similar for both products. Both require a property valuation, an affordability assessment, legal work, and underwriting, and the total process from application to completion typically takes four to eight weeks depending on the lender and the complexity of the case.

The difference is in how funds are accessed after completion. With a home equity loan, the full amount is released at completion. With a HELOC, funds are drawn on demand during the draw period, which means the borrower can access initial funds at completion and draw further amounts later without a new application. For borrowers who need the first tranche quickly but are uncertain about the timing of later tranches, the HELOC structure can be more efficient overall because it avoids the need to borrow the full amount before it is needed.

This article is for informational purposes only and does not constitute financial advice. Your home may be at risk if you do not keep up repayments on a mortgage or other debt secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay. Actual outcomes will depend on your individual circumstances.