Release Equity to Buy Second Property – Is It a Good Idea?

Are you trying to find out how much equity you can release from your home to buy another? You're in the right place. In this article, we'll cover:

• How to release equity from your home to buy a second one.
• What equity release schemes are and how they work.
• The good things and the not-so-good things about equity release plans.
• How to get a fair quote for equity release.

Studies found that over half of equity release customers use equity release to fund home improvement projects¹, demonstrating the versatility of this financial option. For those looking to release equity specifically to purchase another house, our guide is tailored to walk you through the process.

We know that releasing equity from your home is a big decision, which is why we want to give you all the information you need to make the best choice.

Let’s walk you through your options.

Buying a second home?

Is it a good idea to release equity to buy a second home? And can you release equity to buy a second property? If so, how can you do it? I 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. 

Due to their age, income, credit history and affordability, many older purchasers struggle to secure a suitable mortgage or, worse yet, are completely shut out of the mortgage market.

Whether borrowing to buy another property is suitable depends on the total costs, risks, intended use and alternatives. A purchase price below the amount released does not by itself make the decision wise.

Can you take out equity to get it?

It is possible to release equity to buy a second property, such as a holiday home, investment property or rental investment.

Home equity is the property’s value minus secured debt. A lifetime-mortgage advance is borrowed capital, but the chosen product’s use restrictions and tax consequences of buying or letting another property must be assessed.

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.

How do I do it?

The method you use to release equity to buy a second property will depend on the options available to you, which are based on personal circumstances. 

Most standard lifetime mortgages start at age 55, but some payment-term lifetime mortgages are available from 50 and require interest payments for an agreed period. Home-reversion minimum ages and all other eligibility rules depend on the provider. Check the youngest applicant’s age and the actual product criteria. Eligibility depends on the product, age, property, credit circumstances and any required affordability assessment. Minimum property values and borrowing limits are lender-specific. An existing mortgage normally has to be cleared at completion, often using some of the released funds.

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. 

Only consider equity release products or services from a company that is authorised and regulated by the Financial Conduct Authority (FCA). 

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How does it work?

Some providers may allow released funds to help buy another property. Confirm the intended use and occupancy conditions before proceeding.

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. 

The original property generally needs to remain your main residence. Absence limits and holiday-home rules are provider-specific; do not assume a universal number of months.

There may also be tax implications when using released equity to purchase a second home. This is something else you should speak to your financial adviser about.

There are two ways to release equity and buy a second home in the UK. They are lifetime mortgages and home reversion plans. I explain each of these below. 

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Lifetime mortgage

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product. The borrowing limit and rate depend on the actual product and circumstances.

Interest that is rolled up compounds. Its effect over a decade depends on the rate, fees and repayments; request a personalised illustration.

A higher advance or loan-to-value can affect product pricing, but rates do not automatically rise whenever someone borrows more. Compare actual offers and projected costs.

Home reversion scheme

A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold.

A Comparison

Here’s a table that will help you better understand the main differences between a home reversion scheme and a lifetime mortgage.  If you want to learn more about equity release, be sure to read our complete guide.

Category	Home reversion plan	Lifetime mortgage
Ownership	You sell part or all of the home, usually for less than open-market value, and remain under the plan’s occupancy terms.	You retain ownership and borrow against the home.
Property value changes	The provider receives the agreed share of future sale proceeds; only any retained share belongs to your estate.	Sale value and the outstanding loan, interest and charges affect the amount left for your estate.
Inheritance	Selling a share reduces what you can leave; any protected share and conditions must be checked.	Rolled-up interest can reduce the remaining equity. Inheritance protection may be available under some plans.
Repayment	There is no loan to repay for the sold share; the provider receives its share when the property is sold under the plan.	Usually settled when the last borrower dies or moves permanently into care. Payment options and obligations vary.
Money received	A lump sum or income may be available, depending on the plan.	A lump sum or agreed drawdown reserve may be available; access remains subject to the plan terms.

Can I remortgage my home to get 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 replaces an existing mortgage with a new one, potentially with extra borrowing. It does not guarantee a lower rate or total cost. See related guidance.

How much equity do you have?

It’s actually fairly simple to work out!

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.   

If this is something you are considering, make sure you speak to your mortgage adviser beforehand.

Using a second-charge mortgage

A second-charge mortgage is additional borrowing secured on the home alongside the first mortgage. UK products should not be assumed to have the features of US-style home-equity lines of credit.

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.

What are equity release schemes?

Eligibility depends on the product, age, property, credit circumstances and any required affordability assessment. Minimum property values and borrowing limits are lender-specific. An existing mortgage normally has to be cleared at completion, often using some of the released funds. Most standard lifetime mortgages start at age 55, but some payment-term lifetime mortgages are available from 50 and require interest payments for an agreed period. Home-reversion minimum ages and all other eligibility rules depend on the provider. Check the youngest applicant’s age and the actual product criteria.

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product.

Many lifetime mortgages allow interest to roll up without regular payments, but some require interest payments for a set period. Optional repayments, limits and any early-repayment charges depend on the contract.

Looking into the types of equity release schemes with a financial adviser will help you uncover your equity release options.

References

1. Legal & General – Equity Release