Are you looking to buy another house? Maybe a holiday home or an investment property that can be rented out.
If so, you may be wondering if you can release equity from your home to help fund the purchase costs of buying a second property.
If you’ve been a homeowner for a while you have most likely built up quite a bit of equity. This is the part of your home that you own without a mortgage. Borrowing against your home equity is a popular way to fund home improvements or to consolidate unsecured debts.
But can it be used to buy another property?
In most cases the answer is yes. However, there are a number of ways to borrow this money, depending on your own situation.
This guide runs through how you access your equity, the process involved and how to get yourself a good deal.
What does release equity mean?
When we talk about releasing equity from a property, it means accessing the part of the property value that you own outright.
There’s only two ways to get your hands on this:
- Sell the property
- Borrow against the property
Either option will generate a cash sum that you can then spend on another property.
Unless you downsize, the first option will leave you homeless. So most people choose to borrow against their property equity, by increasing their mortgage.
How do you release equity from a property?
DOWNSIZE
If you sell your current home and then buy something cheaper you will have accessed some of your home equity and converted it to a cash sum.
Here’s a quick example:
Suppose you currently own a property worth £500,000 that has £50,000 outstanding on the mortgage. Your equity is £450,000 (500k-50k).
You could sell this property and then buy a cheaper one for £300,000. Afterwards you will have no mortgage and £150,000 in the bank (excluding fees etc).
BORROW
Moving area or to a smaller property is not suitable for everyone. So the other option is to borrow money against your home.
There’s a few ways that this can be achieved, and this will depend on your age and financial circumstances.
Capital raising remortgage
This is likely to be the most straightforward method for most people.
You apply for a mortgage with a new lender and ask to borrow more money than you currently owe. You will need to have sufficient income and affordability.
Further advance
A further advance is like a second mortgage but from your existing lender.
This can be a good option if remortgaging would incur large early repayment fees.
Secured loan
A secured loan, or second charge, is taken out ‘on top of’ your current mortgage but it’s from a new lender. So you end up with two separate mortgages.
These are a valid option when remortgaging doesn’t work or your current lender can’t provide what you need.
Later life mortgages
If you need quite a long repayment period then a later life mortgage might be helpful.
They are provided by lenders who are more willing to lend to people beyond the age of 65.
Equity release
These are a range of mortgages specifically for homeowners aged 55 or over.
Equity release plans allow you to access your equity without needing to prove any income, or make any repayments.
How does it work?
The way you release money from a property will differ slightly depending on the type of finance you need.
Here we will explain how you release equity using a capital raising remortgage.
Work out your equity
To work out how much home equity you have requires two numbers:
- Your home’s value
- The total mortgage debt
It’s OK to use an estimate for your home’s value to begin with, but don’t be too optimistic. Have a look at what properties have sold for recently. Remember that the lender will ask a surveyor to provide a professional valuation.
Add up the amount you owe on mortgages and any secured loans.
Then it’s simply a case of deducting the debt from the property value. Here’s a quick example:
Property value £500,000 less £150,000 secured debts = £350,000 home equity.
Calculate what you need to borrow
Then you need to work out how much money is needed to buy another house. This could be enough to buy it as cash, or perhaps just to put down a good sized deposit.
Remember to include fees such as: mortgage fees, legal fees, stamp duty etc.
The most cost effective option can be to raise all of the purchase price on your main home, as the mortgage rate is likely to be the most competitive.
If this is not possible then you need to factor in another mortgage for the second property. This needs to be suitable for how the property will be used: serviced accommodation, buy to let, holiday let, holiday home.
The maximum capital you can release will be governed by your available equity and your income situation. You may have more than enough equity, but your income needs to be high enough to qualify for the new mortgage amount.
It’s not possible to borrow all of the equity, as this would mean getting a 100% mortgage
There are mortgage options where you can borrow 75-90% of the property value. Here’s how this could work using our example from above, using 90% loan to value.
90% LTV = £500,000 x 90% = £450,000
Then we deduct the current mortgages: £450,000 less £150,000 = £300,000.
So if income and affordability is not a problem, then in this example you would apply for a new mortgage of £450,000 which would raise £300,000 for another property.
Speak to a mortgage broker
It’s important to get the best advice when increasing debts attached to your home.
A broker will be able to explain the options you have to raise the money you need, plus the associated costs. They can also tell you what not to do.
Can you release equity on a fixed rate mortgage? If you currently have a really good fixed rate, you probably want to hold on to this. Also it will have expensive early repayment charges. So a remortgage is not a cost effective option.
Lender’s also have different limits and attitudes towards capital raising large amounts, with some putting a cap on what you can raise.
Your mortgage broker will be able to find the right lending solution, based on your needs.
Apply for a new mortgage
Using the same figures as before, you would apply for a new re-mortgage of £450,000. This would be with a new lender, on new terms.
Once this is approved, and you receive the mortgage offer, the new lender transfers £450,000 to your solicitor.
They will then send £150,000 to your previous lender, paying off that mortgage in full, and then transfer the £300,000 raised to your bank account.
Or they could keep hold of it, if the new property purchase is imminent.
Eligibility criteria
When borrowing money against your own home, all lenders will need to carry out credit checks and affordability checks. This is because the mortgage could affect your home if you fall behind with the repayments.
This applies equally to a remortgage or second charge mortgage.
All lenders have their own specific criteria, with some willing to take on more risk than others.
Here’s some of the more common lending requirements:
Loan to value (LTV)
The maximum LTV when releasing equity will be in the range of 75-90% of your property value. This percentage includes any existing mortgage balances.
Personal income
You will need to provide evidence of your regular personal income. This could be from working, either as an employee or self-employment.
Some lenders will also accept any pension income.
Personal debts
It’s all well and good to have an income that enables you to qualify for a high mortgage amount. But if you also have high monthly commitments for other credit arrangements it will reduce what you can borrow.
Credit history
All lenders will be checking your credit report and credit history. Any bad credit won’t necessarily stop you from borrowing more money but it is likely to reduce the number of lenders you can approach.
Time in ownership
This might seem a bit random. If you’ve owned your home for a number of years then all is good.
However, if you have owned it for less than six months then this will impact your application.
Property type
This relates to your home. There are a number of non-standard property construction methods that lenders either don’t like very much, or they take extra care with.
You will have already experienced this when you arranged the mortgage to buy your home.
Can you remortgage to buy another property for cash?
Technically yes. But this does depend on the price of the new property and the amount of equity you have available.
You might find that this option is a bit cheaper than taking out a buy to let mortgage or second home mortgage.
However, remortgaging your main home to raise capital will need you to pass the lender’s income and affordability checks.
Due to the UK Money Laundering Regulations, you may want to discuss this idea with your solicitor before you begin.
CONTACT A REMORTGAGE EXPERT
If you wish to investigate your re-mortgage options we can put you in touch with a fully qualified whole of market mortgage broker.
What property can you buy?
Borrowing extra money to buy another property is acceptable to the majority of lenders. They may ask if it is a buy to let or second home etc.
But beyond this they are unlikely to need any specifics.
More important to them is that you have the income to support the new borrowing, for the full mortgage term.
This leaves you free to decide on the property type: Buy to let, holiday let, second home, semi-commercial, commercial, barn conversion or maybe a castle.
Releasing equity is also helpful if you want to buy a house that has suffered with subsidence.
What if you own your home outright?
A property that you own outright, without any mortgage, is referred to as unencumbered. With no mortgage you will own 100% of the equity in your house.
You are able to borrow money against an unencumbered or mortgage-free property.
Ready to explore your options?
If you’re on the cusp of starting your mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
They will make the process smoother and more profitable than going it alone. And remember, knowledge is power.
The more you know, the better decisions you can make. Keep reading, keep asking questions, and keep moving forward on your journey.
Find a mortgage broker
Equity Release Guide
Our complete guide to unlocking the cash from your home using an equity release plan.
Remortgage Guide
Our Guide covers the remortgage process, including how long it takes, and the different options you have when switching your mortgage.
Capital Raising Mortgages
Our guide will walk you through how capital raising mortgages work, what you can spend the money on, and where to get one.
