Release Equity to Buy Second Property – Is It a Good Idea?
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Can you release equity to buy a second property, and if so, how can you do it? We discuss the different methods of releasing equity to buy another property, including equity release for seniors and the possibility to use a second charge or remortgage to buy another property as a younger homeowner.
Can you release equity to buy a second property?
It is possible to release home equity and use the cash to buy a second property, such as a holiday home or rental investment. Home equity is defined as the value of your home that you own outright, calculated by subtracting any debt attached to your property – usually just a mortgage – away from the current property value.
For example, you might own a £200,000 home with an outstanding £100,000 mortgage. This means you have £100,000 home equity (50%). You can use some – not all! – of this equity to help buy another property outright or with another mortgage.
There are multiple ways of releasing equity from your house to buy another property, depending on your age and finances.
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How do I release equity from my property to buy another?
The method you use to release equity to buy another property will depend on the options available to you, which is based on personal circumstances.
The most exclusive method of releasing equity to buy other property is reserved for senior homeowners who already own their home with no existing mortgage. These are called equity release schemes.
Homeowners who aren’t seniors can instead remortgage to buy another property, or they may use a second charge mortgage to access some of their home equity and help buy another property. Both of these methods may require the homeowner(s) to get an additional mortgage to help fund the rest of the purchase, such as a buy-to-let mortgage if they are looking for a rental investment.
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What are equity release schemes?
Equity release schemes are available to senior homeowners on their main residence when they own their home outright and it is valued above £75,000. They must meet a minimum age requirement to qualify, usually between 55 and 65 years old.
An equity release scheme allows the homeowner to access some of their home equity and never have to make any monthly repayments. The debt is paid back in another unique way. If the homeowner moved into long-term care, they must sell their home to repay the debt. If they never move into residential care, they only repay the debt from the sale of the property after death from their estate. For as long as they are living in the property they do not need to make any repayments.
How does equity work when buying a second home?
Equity release schemes allow the homeowner to use the money for any purpose. So, technically they could use it to buy a second home, especially when it’s difficult for seniors to get another (buy to let) mortgage – but there can be somewhat of a complication.
The homeowner can be forced to sell their original home and pay back the debt if it is found that they are no longer living at the property. So any purchase of a second home must be as a rental investment or as a holiday home only rather than a new home to live in.
Each lender may have different criteria on what constitutes a holiday home and how much time is spent at the property. The maximum amount of time you’ll be allowed to spend in any holiday home will be a few months within a calendar year. You should discuss this with your financial adviser, especially if you plan to downsize to the holiday home in the future.
There are two ways to release equity and buy a second home in the UK. They are lifetime mortgages and home reversion plans. We explain each of these below.
A lifetime mortgage allows up to 60% equity release on the full value of the property as there will be no existing first charge mortgage. This money is subject to a fixed interest rate for the entirety of the deal. The interest, alike the capital loan amount, does not need to be repaid each month and is only repaid when the property is sold.
However, even a standard interest can more than double the debt over a decade. Some people choose to make voluntary interest repayments to stop their debt from growing.
Home reversion scheme
A home reversion plan does not charge interest on the amount of equity taken out. But it does require the homeowner to give up a larger portion of the property’s eventual sale proceeds, usually more than double. For example, you may take out £40,000 (20%) equity on a £200,000 property and then have to pay back 50% of the sale value (£100,000+).
What are the benefits of equity release?
The benefits of using an equity release scheme to buy a new property are:
- The money is legally allowed to be used for this reason, but you will have to be mindful of residential living restrictions.
- The money is tax-free because it is a loan.
- It’s a financing solution when you cannot get a mortgage in your older life.
- It’s an investment so your beneficiaries may still inherit a valuable asset after you die, even when the debt grows on your main home.
- You will never have to make repayments
- When you choose an equity release plan from an authorised and regulated lender that is also a member of the Equity Release Council, you are given a number of assurances and protection.
What are the pitfalls of equity release?
The biggest pitfall of equity release is taking out more money than you actually need. It could create a bigger debt that could have been avoided. If you don’t 100% know how much you’ll need, you could consider taking out a drawdown facility instead of accessing the equity as a lump sum. Interest is usually only applied to the amount drawn down, so you can avoid erroneously taking out too much equity.
Can I remortgage my home to buy another property?
Younger people do not have access to equity release schemes, but they can still use some of the equity they have built up to help buy a second property. They’ll probably need to use the money and another mortgage to complete another property sale, but it all depends on individual circumstances.
Remortgaging is when you swap your existing mortgage for another one with a better interest rate. But when you remortgage to buy another home, you simultaneously ask to borrow more using your home equity as collateral.
For example, if you have a £200,000 home with £100,000 mortgage and £100,000 home equity, you ask the new mortgage provider to lend you £100,000 to pay off your old mortgage, and some additional money that can be used to help purchase a second property. So, you may ask for a £150,000 mortgage and use the extra £50,000 to help buy a rental flat or holiday home.
Using a second charge mortgage to buy another property
Another option is to use a second charge mortgage, also known as a home equity loan or home equity line of credit (HELOC). These are additional loans taken out on a property and secured with home equity. So you keep your existing mortgage and just apply a second debt to the property. By not swapping your outstanding mortgage to another provider, you may avoid some costly early repayment fees to boot.
Returning to our previous example, you have £100,000 equity in your home and a £100,000 mortgage. The mortgage remains the same but you ask a lender to let you borrow £50,000 against your home equity as a secondary debt on the property. Repayments will be separate from your mortgage repayments. The amount you can borrow against your equity will depend on your finances and the lender’s loan to value ratio.
More information on releasing equity!
For lots more information on releasing equity with any of the methods mentioned above, head back to our blog soon. We have covered all of the above in plenty more detail and answered the most asked relevant questions on each. Releasing equity can be a big decision, so make sure to do further research!