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Can I use equity release to buy a second property?

View profile for Zoe Fellows
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If you own your current property and are over 55 years old (some schemes may apply different age requirements), you can release equity in order to buy a second property, or it may be more appropriate to consider re-mortgaging or a buy-to-let mortgage. Zoe Fellows, Equity Release specialist in our Fareham office, explains how you can do this and the factors you need to consider in order to proceed with the right decision for your own circumstances.

There may be several reasons why you are looking to buy a second property; perhaps you are seeking a new source of income by renting out the new property or your current home, you would like a property to holiday in, or as a home for a relative. Whatever the reason, equity release can be an effective way to fund this new chapter in your lives.

What is equity release?

If you have built up the equity in your property over the years, it may be possible for you to release this and use it towards another property purchase. The equity may have increased due to the value of your property rising due to market conditions, or if you have paid down the amount you have borrowed.  In order to determine how much equity you could have and therefore the value of a property that you could afford, if your property is now mortgage free, the total value of your house is your equity.  If there is still a mortgage outstanding, your equity is your property’s value minus your remaining mortgage debt. 

There are two types of equity release available to you; a lifetime mortgage or a home reversion plan. The main difference between the two is that under a home reversion plan, a part of the property is sold and you receive a lump sum, while under a lifetime mortgage, you borrow against the value of your home.  It is important to consider which of these may be best for you, as they will effectively determine your ownership of the property, impacting on the future value of your estate and consequently issues such as Inheritance Tax and Capital Gains Tax. 

To find out more about the different types of equity release and whether they may be appropriate for you, click here

Is re-mortgaging also an option?

While equity release may be viable for you, it is important to consider every opportunity. It may be more appropriate for you to consider re-mortgaging your current property. If you still have a mortgage on your current property, you will may be required to make early repayment charges, which could make this option more expensive in the long run.   

Releasing equity to purchase a buy-to-let property

If you are looking for a second property to use as a rental income, then equity release or re-mortgaging would not be appropriate as a buy-to-let mortgage would be required. In order to do this, it is likely that you will need to show how much rent you foresee being generated from the property, as well as evidence that you will be able to afford the future payments on the mortgage. A lender will also consider external factors such as the rental market in the area you are looking to buy. 

Zoe concludes, “Every year, thousands of people use equity release to purchase a second property, however this in itself does come with serious considerations. The right product for you will be determined by your own situation and for what purpose you wish to use the second property. Seeking appropriate financial and legal advice is crucial in making that decision, and we can explain the different options available to you, as well as help you consider the other implications of owning a second property, such as the increased Stamp Duty Land Tax.”

To discuss your situation with Zoe, you can call her on 01329 222079 or email zoefellows@warnergoodman.co.uk.  Alternatively, you may also find the following resources useful:

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.