With the increasing amount of equity release products being made available on the market for consumers of all types, more and more homeowners are becoming curious about the unique investment opportunities that these different forms of equity release products can bring.
One of the most popular investments homeowners make when using equity that they release from their home, is the purchase of another property as a buy-to-let. They let their second property to tenants using a tenancy agreement to receive a regular monthly income and capital growth over the long term.
If you are curious about releasing equity from your current home for the purposes of investing in a second property, read on to find out everything you need to know in order to do so!
What Is Equity Release?
Equity release is a method that allows homeowners to borrow cash funds by using the value of their current home, or other property, as collateral. Since homes are generally the most valuable physical possession that a person owns, it only stands to reason that homes would become the go-to method of collateral that people would use to borrow cash funds.
The cash funds that you release from your home can be used in many different ways, but one common way that they are used is to fund the purchase of a new property as an investment. This new property, after it is purchased, can then be rented to tenants, creating a theoretically unlimited source of passive income for the property owner / landlord.
Equity Release Creates A Great Opportunity For Investing!
By releasing equity from your home, you may be able to get the investment funds needed for a deposit, to then purchase a buy-to-let property and start generating passive income for you and your family.
Many homeowners don’t realise that they are sitting on a potential goldmine, and that there is a way that they can turn the value of their home into unlimited rental income by using released equity to purchase a second property.
In this article, we’ll go over all of the different ways that homeowners can release equity from their current home in order to fund the initial deposit on another property. When you’re done reading, you’ll be well on your way to turning the value of your home into passive income, meaning more funds for your future.
Methods Of Releasing Equity From Your Home
There are two methods for releasing equity from your home:
- Additional Borrowing
Remortgaging, sometimes referred to as refinancing, is simply replacing your old mortgage with a new one. The exciting part is that if your home has increased in value, you can increase the amount of your new mortgage.
Once your new mortgage is in place and has paid off your old mortgage, you will be left with the surplus which can then be used as a deposit for a buy-to-let property. The surplus is also ‘tax free’ because it’s a loan. Similar to a car loan, you don’t pay tax on it, only interest.
There are a couple of factors which you need to be aware of though. Firstly, you will need to check the terms of your current mortgage to see if there are any penalty fees or early redemption charges, for ending your mortgage early. Secondly, you will need to meet the affordability criteria for increasing the mortgage amount that you are wanting to borrow.
Additional Borrowing is increasing the mortgage amount with your current mortgage lender. They could either increase the mortgage amount owed on the same product, or offer you an additional product which could have a different interest rate. This is an alternative option if you have early redemption charges on your current mortgage as it will still allow you to borrow against the equity in your home, but you will still be required to meet the affordability criteria though.
Refinancing Your Current Home To Purchase A Second Property
If you are interested in refinancing your home in order to purchase a second property, I would first recommend talking to your current mortgage lender to discuss your options and the mortgage products they may have available to you.
If your mortgage lender is separate to your bank, I would then recommend contacting your bank to discuss the mortgage products they are willing to offer.
In addition, I would then recommend contacting a residential mortgage broker to get details of mortgage products that they can offer. Most homeowners will choose to consult with a third-party mortgage broker that can help them compare the rates and fees being offered by their current bank with those being offered by other competing lenders. The market has become increasingly competitive, so there may be a lender out there who is willing to offer you better terms and conditions than your current one – all you have to do is find them.
Can You Refinance Your Home If You Haven’t Paid Off The Current Mortgage?
Providing you have enough equity in your home, and you meet the affordability criteria of the new mortgage amount, you can apply to refinance your home before paying off your current mortgage.
While many homeowners with outstanding mortgages often try to take out a personal loan instead of another mortgage, personal loans that are secured against your home should generally be avoided. As well, they will likely still be classified as additional borrowing regardless.
In most situations, borrowing money with a mortgage is a much cheaper and more sustainable option than borrowing money with a personal loan. This is typically the best option whether you already have a mortgage loan taken out or not.
How Do You Know How Much Equity You Have In Your Home?
Before determining how much equity you have available to release from your home, it’s important to understand what exactly equity is. When we get down to it, equity is defined as the difference between the price that a homeowner paid for the property (or the amount still owed on the mortgage) and the current value of the property on the open market.
The amount of equity that you may have available in your home is going to be determined by the property’s current value. In order to find out the current value of your property, you can use websites such as rightmove.co.uk and zoopla.co.uk to look at current listings of comparable properties and recent sales prices.
It may also be worth talking to a local estate agent that would be able to perform a more in-depth and free valuation of your property in order to see how much it is truly worth. While websites and online listings can give you a great general idea of your property’s value, getting a professional consultation is always the best option.
Mortgage Lenders Will Conduct Their Own Valuation On Your Home
Your lender will always take it upon themselves to valuate the property on their own volition with their own agents, but having your own idea of the worth of your property is always a good idea.
Knowing the current value of your property on the open market will give you a good idea of how much equity you will be able to release from it, and will also give you an increased amount of peace of mind when it comes time for the lender to make their own valuation.
Affordability For Remortgaging To Buy A Second Property
If you are planning on purchasing your second property specifically to let it out to a tenant or renter, this is known as a “buy-to-let” property. Buy-to-let, or BTL, mortgages function a little bit differently than traditional homeowner residential mortgages.
In order to meet the affordability criteria for a BTL mortgage, the lender will want to make sure that the BTL property you are proposing to purchase is likely to command enough money in rent each month in order to cover the amount that you will be expected to pay in your new monthly mortgage payments.
How Much Will My Buy-To-Let Property Need To Make In Rent?
Lenders will typically require that the proposed monthly rental income is at least 125% of what the monthly mortgage payment will end up being. Meaning you should be making more than enough in rent to make your new monthly payments in full and on time.
How Much Equity Would I Need To Release To Buy A Second Property?
In order to determine how much equity you would need to release from your current property in order to put the appropriate amount of money down as a deposit on a new one, you will first have to determine the value of the new property that you are wishing to purchase. Traditionally, you will need to make an initial deposit of anywhere between 15-25% of the total value of the new property.
How Do I Figure Out How Much Money I’ll Need for My Deposit?
To give a more in-depth example, if your new property costs £250,000, then you will most likely need to make an initial down payment of somewhere between £37,500 and £62,500. Thusly, you will need to make sure that you release at least that amount of equity from your current home in order to get enough to make your initial deposit.
Although a lender requiring an initial deposit of only 15% on your second property may seem like a good idea at first, borrowers should be advised that they will likely end up paying higher interest rates compared to a mortgage product that requires a 25% deposit.
This shouldn’t be a ‘show stopper’ though if you only have access to limited funds. The most important thing you can do is check the numbers of your potential investment before committing to a buy-to-let mortgage product. I have written a short article here which explains how you can easily calculate the potential net yield and return on investment.
Can I Buy A Second Property And Rent The First Property?
While it is certainly more common for homeowners to keep their first property as their own established place of residence and rent out their second property, the inverse is also possible should that be the homeowner’s wish.
If you would like to release equity from your current property in order to buy a new property, and then convert your current home into a rental property, this can certainly be done. However, you will need to talk to your current mortgage lender of your home. They may agree to grant permission to let tenants move into your old home, or they may inform you that you will need to switch to a buy-to-let mortgage product.
Either option is possible, but it’s imperative that you inform your mortgage lender of your plans to avoid breaching the terms and conditions of your current mortgage.
Can I Mortgage My House If I Own It Outright?
If you are a homeowner who already owns your house outright and you don’t owe any money on a mortgage or secured loan, you will still be able to release equity from your home providing you meet the affordability criteria of the mortgage lender.
Understanding Unencumbered Properties
Homes that don’t currently have a mortgage or secured loan attached to them are known as “unencumbered properties”. These properties generally pose the most value to the homeowner since the homeowner doesn’t owe any money on them.
For this reason, owners of unencumbered properties are in a uniquely strong position to borrow money against them!
Unencumbered Properties May Have More Equity
Owners of unencumbered properties may be able to release a greater amount of equity from their homes, and may be able to get better terms from their lender, given that they own 100% of the properties value.
Since the homeowner isn’t currently having to make monthly payments on an outstanding mortgage, they are more likely to have a greater amount of free funds available to make payments on a new mortgage loan. For this reason, owners of unencumbered properties may actually be in the best situation possible to release equity from their current property to purchase an investment property as a buy-to-let.
How Much Can I Remortgage My Home For?
The amount that you will be able to remortgage your home for will dependlargely on the value of your home, the outstanding amount of any mortgages or loans tied to your home, your affordability based on your current financial situation, and the new mortgage lender.
There are some lenders offering residential mortgage products that only require an initial deposit of 10% from the homeowner, meaning that the homeowner will then be able to borrow up to 90% of the current total value of their home in cash funds. However, in order to be approved for the mortgage loan, homeowners will first have to meet the affordability criteria stipulated by the new mortgage lender.
Can I Release Equity On a Buy To Let Property?
Property owners may be able to release equity from their buy-to-let property if the property has gained capital growth since the purchase. The mortgage lender will check that the current rental income is sufficient to meet the increased loan amount before the mortgage application is completed.
As with other buy-to-let mortgages, if the property owner is looking to use the equity released from their buy-to-let property as a deposit for another buy-to-let property, the lender will want to see that the proposed rental income for the new property will cover the new mortgage payments at the same ratio of at least 125% of the new monthly mortgage payments.
Releasing equity on a buy-to-let property is a great way to fund the purchase of another buy-to-let property, which will generate an even greater amount of passive income through monthly rental payments down the road! Releasing equity from your buy-to-let property may be exactly what you need to start taking steps to grow your property portfolio and guarantee more financial freedom for you and your loved ones in the future.
Professional property investors regularly review their portfolio once or twice a year to help improve and expand their investments.
Using Equity to Buy a Rental Property Can Be a Great Investment!
If you are in a position to release equity from your home, it is worth considering investing in a buy-to-let property. Sure, you could use the cash to buy a new car, pay for an extension, a luxurious holiday or other treats, but spending your cash on those items will not increase your monthly income or wealth over time.
Not only could you release equity from your current home to buy a rental property, but you could also use the equity to make an initial payment on the home of your dreams, and then rent out your current home in order to afford the mortgage payments on your new home!
This is a great alternative if you find yourself in a position whereby you are unable to receive the asking price of your current home, for whatever reason, and you don’t want to lose the opportunity to purchase the property that you want to move into. That’s exactly what my neighbours did a few years ago.
If you’re seriously considering investing in a buy-to-let property, please download my free guide, which will walk you through each step to help ensure your purchase a good property with a strong rental demand.