Whether you want to build upon your property portfolio or find a new, low-hassle income for your retirement, releasing equity is still a relatively significant decision.
In the UK, you can either release equity, acquire a new mortgage or remortgage your property, allowing you to release some form of money in either a lump sum or monthly payments.
Releasing equity to buy a second home is a standard practice amongst people trying to improve their property portfolio as they can leverage the situation and let out the existing property.
In this article, we will be delving into what equity release is, what kinds of equity release are commonly used, what the advantages and disadvantages of equity release are and how you can release equity on your property.
For quick navigation, please use our interactive menu below:
- What Is Releasing Equity?
- How Can You Remortgage To Buy A Second Property?
- How To Use Equity To Buy A Second Home
- What Are The Pros And Cons Of Equity Release?
- How Do You Release Equity To Buy Another Property?
- Tips For Investors Releasing Equity
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What Is Releasing Equity?
Release Equity is the process of unlocking money on the value of your property. Usually, this is an agreement between you and your mortgage provider that lets you access the funds from the equity without you leaving your home.
Equity Release can be provided to you in the form of a lump sum, regular smaller payments or a combination of both, and is far easier to obtain if you are over the age of 55.
You can’t release equity if you have already paid off your outstanding mortgage or own the property outright.
Equity Release is often designed in two packages; Lifetime mortgages and home reversion.
What Is A Lifetime Mortgage?
A lifetime mortgage is when you take a mortgage on your main property and retain full ownership. The lifetime mortgage must be repaid once the last borrower dies or goes into extended care.
Some of the property’s value can be set as an inheritance to your family. Lifetime mortgages are the most common type of equity release.
The issue with a lifetime mortgage is that you are charged interest on the borrowed money even if you are not making monthly repayments. If you take the excess cash out of the property, you will pay more than if it was in a savings account.
What Is A Home Reversion?
A home reversion is when you sell part or all of your property to a home reversion lender — in return; you will receive a lump sum of money or regular payments. You have the right to continue living on the property until you die, but you must agree to maintain and insure it.
If you sell only a fraction of the property, you can save a percentage of the value for later use or an inheritance.
Unless you decide to take out further equity releases, the value percentage will always remain the same regardless of the change in property value.
When the last borrower dies or is moved into long-time care, the property will be sold, and the sale proceeds are shared according to the remaining proportions of ownership.
Most home reversion providers will insist that you are over 60 before you can apply, and the percentage of the market value you will receive will largely depend on when you take out the plan. Usually, you can expect between 20% to 60% of the market value of your home.
Is Releasing Equity And Remortgaging The Same?
Although somewhat similar, releasing equity and remortgaging are different. Equity release has no monthly repayments, while remortgaging does — if you want to remove large amounts of money in one lump sum, then you will benefit from equity release more.
What Is Your Home’s Equity?
Your Home’s Equity is the value it holds, which may correlate to the property’s current market value.
You can work out your home’s equity by taking the current market value of your house and minus any outstanding debt you have. The more equity you have, the more you can access through a lifetime mortgage.
How Can You Remortgage To Buy A Second Property?
If you’re wondering how to remortgage to buy another property, then this section is for you! Receiving approval for a change in your mortgage agreement with your mortgage provider will depend on their criteria.
Mortgage providers will evaluate your circumstances to calculate whether or not a change in your mortgage is possible. The most significant factor in a mortgage lender’s decision is the amount of equity or value in your house you have.
How Will A Mortgage Provider Assess You?
When you go through the remortgaging process, you will be put under a remortgage assessment which focuses on where you want to put the funds, the amount of equity on the property you want to remortgage, your affordability, your credit score and the loan to value (LTV) of your remortgage.
What Type Of Property Can You Buy With A Remortgage?
Similarly to using equity release, there are a few types of property you can purchase from a remortgage, including:
- Buy To Let
- Buying a second home
- Let To Buy
- Buying a Holiday Let
- Investing in commercial property
Why Do You Need Equity To Remortgage?
Before you can apply for a mortgage you will need to assess the equity you have in your home.
You will need to arrange a house valuation to work out an accurate value of your home, most mortgage providers will insist they carry out their own valuation on top of this.
The calculation to work out your equity is the same for an equity release process, but if you own your home outright or it is unencumbered then when you get a remortgage it is known as an unencumbered remortgage.
You will need equity when you remortgage, as some mortgage providers may lend up to 95% Loan To Value, but their rates on offer are likely to be high.
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How To Use Equity To Buy A Second Home
This is one of the most common ways to start investing in property; usually, people release equity to invest in a second home or Buy-To-Let.
Depending on the purpose of the funds will depend on your options.
There are different avenues to choose from when you remortgage and buy a second property. But Buy To Lets and Let To Buys are often the standard route for people looking to retire, holiday lets and acquire holiday homes:
Let To Buy
If you decide to Let To Buy in a property with an existing mortgage, you can let out the leading property and buy another one to live in. Let To Buys can be achieved by attaining a Let To Buy mortgage.
Whether you’re looking to retire or want a home abroad, releasing equity and letting out your current primary residence while you move to a home abroad can be a great way to receive a steady income and live somewhere sunny.
Buy To Let
A Buy To Let is where you purchase a second property and rent this out to tenants. When you release equity from a buy-to-let property, you can release capital.
With the rise of Airbnb and Booking.com, holiday lets have taken the main stage over the past decade. Holiday Let allows you to purchase a property and rent it out short-term to holidaymakers.
However, if you have a holiday home in the uk you may need to read up on holiday lets as second homeowners now have to prove that the properties are being rented out for a minimum of 70 days a year to qualify for business rates.
What Are The Pros And Cons Of Releasing Equity?
Everyone’s circumstances are different, and there are always multiple factors to consider before considering releasing equity.
We would recommend weighing up the following before you jump in with both feet first as they may affect how much you are able to borrow:
- Your age has a massive impact on how much equity you will be able to release. The older you are, the more you will be able to release from your equity.
- Your income does not affect your ability to access equity release, but it’s vital that you weigh up how to leverage the equity release for future income.
- How much money do you want to release? You can either remove the entire sum or make monthly payments, so you need to figure out how much money you need to invest initially in a property.
When looking to invest, it’s tempting to concentrate on the immediate tax-free cash boost you will receive from the equity release, but we recommend contacting a financial advisor to help you make a balanced decision.
What Are The Advantages Of Releasing Equity?
Releasing equity can incredibly benefit someone looking for a lump sum to invest now rather than leaving it locked away in your home.
If your home has increased in value over the time you’ve owned it, then equity release will enable you to get some of the additional weight and place it towards a retirement home or a Buy To Let.
Releasing equity is a great way to improve your investment portfolio and continue growing, especially as the rental market grows through a low supply season.
The Equity Release Council is a regulatory board that protects equity release companies and customers throughout the process. The Equity Release Council ensures that you must live in your home until you die or move into care, and you never owe more than the total price of your home, even if the value drops.
If your savings or sources of income are not enough to cover £33,700.20 per year for a comfortable retirement, according to Bower Home Finance, then releasing equity may be very advantageous as you will have an extra source of tax-free cash.
What Are The Disadvantages Of Releasing Equity?
The most significant disadvantage of releasing equity is that you will not receive the total value of your property. With a lifetime mortgage, you can expect between 18% and 50% of your property’s value, and with a home reversion, you can expect between 20% and 60% of your home’s value.
If you fail to meet the regulations of The Equity Release Council, you may meet financial penalties, so it’s essential that you contact a solicitor before you make any decisions.
If you decide to release equity, you will reduce the inheritance given to any beneficiaries when you die.
How Do You Release Equity To Buy Another Property?
We recommend that you contact a financial adviser or mortgage advisor to help you decide whether an equity release scheme is suitable for you or whether you should try alternative avenues like downsizing.
There are plenty of equity release schemes available, and your advisor will be able to make the most educated decision as to which suits you best. It would help if you also had a solicitor review any paperwork to double-check and ensure everything is legal.
How Much Does An Equity Release Cost?
While the equity release itself is often cost-less, you will need to do a fair amount of work and valuations before you can proceed with an equity release which will usually cost around £3,000:
- Legal Fees.
- Valuation Fees.
- Financial Advice Fees.
- A Mortgage Arrangement Fee.
- A completion Fee (when the scheme ends).
How Do You Release Equity?
Equity releases are not a quick process; they can take anywhere from 6 to 8 weeks to release equity from your home — you shouldn’t rush the process.
Occasionally the process can be slightly longer depending on the quality of solicitors and equity release provider you have chosen.
The process to release equity will vary depending on the equity release scheme you decide to use, but here is our recommended process:
1. Receive Professional Advice
You should receive professional advice from a financial or mortgage advisor specialising in equity release. They can give you an unbiased understanding of the best option for you and find the best deal for you.
Remember that when you sign up for an equity release, it’s not just yourself you must think about. Whether you end up with a lifetime mortgage or a home reversion scheme, it will affect the inheritance that you can leave behind.
2. Use A Regulated Provider
When you choose your equity release provider that the Equity Release Council regulates, you should find their logo on any paperwork or website if they are. The Equity Release Council will protect you from scenarios like negative equity.
3. Stage Your Borrowing
We recommend that you borrow in stages as it is more cost-effective on a lifetime mortgage because you will pay less interest over time. To avoid compound interest, consider paying off the interest as you go.
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Tips For Investors Releasing Equity
If you are a property investor or someone with a high-value property, releasing equity or capital from the property may allow you to invest it elsewhere at a higher rate of return.
There is always a high demand for equity schemes, especially in a market which favours high value yielding investment property.
Equity release schemes are becoming increasingly popular amongst investors because of uncertainties in the market and challenges such as high inflation and reduced overall investment returns.
The current property market of falling house prices, high inflation and uncertainty of financial banks across the globe is making equity release a desirable option for investors. Here are some of the current trends for equity releases we have noticed over the past few months:
Switching Up Location
Although many areas in the UK produce lower-than-normal yields, some investment hotspots still have the potential for double-digit rental gains.
Some regions in the UK which have been highlighted as investment hotspots in 2023 are:
Investors leverage the current economic climate by releasing equity in low-performing investments and investing in properties with more potential in the short, medium and long term.
Buy For The Future
Using equity to buy property in areas which are up-and-coming, like Kirkstall in Leeds, is one way of future proofing your investment. The properties tend to be relatively cheap as they are bricked terraced or are under commercial land use waiting to be redeveloped.
To help you in your search for the perfect property to release equity into, we would recommend looking for areas to which have recently undergone river-side development like flood barriers and walls.
Self Sufficient Buy-To-Let
While some investors and landlords are remortgaging their property investments and releasing equity to buy additional, similarly performing properties, the released funds are then used for maintenance and refurbishment costs, and the properties are self-sufficient.
This can be helpful, as when the market begins to pick back up, these properties will start to produce higher returns as they are effectively breaking even in the current market.