Using equity release is a viable route to purchasing a property for some investors.
It can present a way to access sums of cash tied up in a property since it was first bought, but like a mortgage it comes with terms and conditions that need to be carefully considered before committing.
Let’s take a look pursuing equity release to buy another property, what it entails, and how to decide if it’s right for you.
What is equity release?
Equity (when talking about property) refers to the value embedded in the property, minus any liens (e.g. mortgage amount still to be paid off).
It can be defined as the difference between the current value of the home and the amount still owed to your mortgage lender.
This means that, over time, equity in your home tends to increase as mortgage repayments are made. However, it can also decrease as the value of the home itself decreases. Equity often fluctuates as a result, since the housing market naturally tends to see house prices rise and fall over time.
Equity release is the act of accessing equity tied up in your home, ‘releasing’ value without having to sell the property on. This is often given in the form of a lifetime mortgage, which doesn’t sacrifice ownership of your property.
Another way to release equity is through a home reversion scheme, which sees the lender buy a portion of your home for less than its true value.
Can I release equity to buy another house?
Eligibility for equity release firstly depends on age. True equity release products aren’t available to anybody younger than 55 years of age.
This age limit is set by lenders to mitigate risk. Equity release is often used to access extra money in retirement, and the money is lent with the understanding that it will be repaid largely by the sale of your home after you pass away or move into long-term care.
This means that equity release loans aren’t intended to be repaid early, though they can be if the lender agrees, which may incur penalties similarly to repaying a typical mortgage early. The loans also accrue interest, which can be repaid or can instead be added to the total loan amount.
To dampen the long-term effect of interest, most lifetime mortgages come with a ‘no negative equity guarantee’ which assures that you and/or your estate will never owe more than the property’s value. This is another reason for the minimum age requirement, to further hedge the risk of this loss to the lender.
Equity release can be used to buy a second home, but with some caveats. You will need to live in your current home for at least six months of the year, and you will still need to pay stamp duty land tax as well as the usual conveyancing fees like with any home purchase.
Releasing equity for buy-to-let
What about using equity release to acquire a buy-to-let (BTL)? It’s possible, but some lenders will not offer lifetime mortgages on BTL property, so each prospective lender needs to be queried and considered.
Using equity release gains to purchase BTL property comes with the same requirements as buying a second home.
You may be able to release equity on a BTL property that you already own. Since equity release doesn’t forfeit ownership, this can carve out some extra profit from your property while it still continues to generate rental income.
Are there any risks to equity release?
Releasing the equity on your home comes with the agreement that it will be sold to repay the lender sooner or later. This means that you cannot release equity on a property and pass it down to loved ones.
It also means that there could be less inheritance for your estate. Lenders will only recoup the loan plus interest, so your inheritors will receive any excess of that amount once the property sells. You may be able to ring-fence a portion of the value for your inheritors so that it’s protected, depending on the lender and their agreement.
If the property sells for less than the amount owed to the lender, beneficiaries will not be charged for the further amount so long as there was a no negative equity guarantee in place—this is why those guarantees are so sought-after.
How to buy a second property using equity
To get the latest information on equity release in digestible, plain language, contact us at Mistoria Estate Agents. We can share our specialist knowledge and help you find the best route for you, and even help with selling a property if you or someone you know has come to the end of a lifetime mortgage.
Contact us today to find out more.