First off, an important clarification - it’s very easy to confuse the two terms, and a whole host of information online uses these same words to mean two very different things:
“Releasing equity“ purely describes the action of raising money against equity in a property, and can be done via a number of different ways that we’ll discuss in this guide (with equity release being one of them).
“Equity release” is the industry term for a “lifetime mortgage” – a special type of borrowing for someone over the age of 55, who essentially takes money from the property and has interest roll up over time without the need to make any monthly repayments.
For the purposes of this article, we will refer to equity release as lifetime mortgages, and use the term “releasing equity” to describe the process of raising capital in whatever method.
What are the different ways to release equity from a buy to let property?
For anyone looking to raise capital from their buy to let property, there are a number of options available:
Buy to let Remortgage with capital raising
Buy to let further advance with the same lender
Buy to let secured loan
Sell the property
Equity release / Lifetime Mortgages
Releasing equity with bad credit
Remortgaging a buy to let to release equity
This is relatively straightforward – if you remortgage a buy to let to raise capital, you repay the current mortgage (if there is one) and borrow the extra which gets paid into your account. Say your property is worth £200k, you owe £50k, and want to borrow £75k - You’d take a new mortgage for £125k with a new lender and settle the existing mortgage.
Buy to let further advance
This is where your current lender lends more money on top of your mortgage, usually as a second mortgage product with rates available at the time of applying. On completion they just put the finds into your account! The application can be a little more straightforward as there is usually no need to engage in any legal processes, but, can be more expensive depending on the rates available elsewhere at the time.
Buy to let secured loans
This is where you leave your current mortgage as it is and take a loan as a second charge on top of your mortgage (the first charge), with a new lender. These can be an excellent way of releasing equity when you either don’t want to change your current mortgage, or can’t.
This is where, if you have multiple properties, you secure one single mortgage over all of them. It can result in an attractive rate as the gross loan to value ratio can be lower if you have more equity in multiple properties.
Sell the property!
You can sell the property and get the cash, basically! Be sure to factor in capital gains and other tax and fees if this is the plan!
Equity release BTL / lifetime mortgages on buy to let
More detail elaborated below – this is a rather big subject!
Equity release / lifetime mortgages on buy to let
Retirement can be a daunting thought, especially with increasing living costs and the prospect of having less income to do all the things you've wanted to do whilst working.
Retirement should be enjoyed, right? After years of hard work and the achievement of buying a property or even two, homeowners should feel comfortable and excited about the prospect of free time, holidays and well deserved relaxation.
For many over 55's though, it can be particularly frustrating when they find themselves asset rich but cash poor.
That’s why increasing numbers of people are choosing to unlock some of their wealth through releasing equity on their buy to let property.
Equity release has been growing an incredible rate over the last few years, as more and more people are turning to the equity in their second properties as an important source of income.
In this section of the article we will look at:
Defining equity release
How to release equity from your buy to let
How much equity you could release from a buy to let?
Common myths of equity release
Equity release with bad credit
What is equity release?
Also known as “lifetime mortgages”, Equity Release lenders take a charge over the property and money is released to the borrower, with interest payments being rolled up and added to the loan rather than paid monthly. If the borrower dies or goes into care, the family / estate must sell the property and the debt is cleared.
Under guidelines set by the equity release council, if the property does not cover the full amount of the debt, this cannot be chased or claimed from the estate.
How does equity release work?
The same basic criteria that apply to releasing equity from your main residence also holds true for using equity release on a buy-to-let. How much you can borrow depends on your age and your health.
Buy to let Equity release schemes are only for those over the age of 55.
You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.
Buy to let equity release allows landlords who are letting out their property to release equity, whether that be used for their retirement, renovating their rented property or for any other worthwhile purpose, without putting up their own main residence as collateral.
How much equity can I release on a buy to let property with a lifetime mortgage?
Most lenders have simple but different equity release calculator for buy to let properties. In general, they’ll calculate the maximum amount you can release from your property using a percentage of the properties value and your age when you apply for the loan.
For residential lifetime mortgages, the percentage of equity that a person can release starts at around 9% for those aged 55 and healthy, increasing to 55.5% for those unwell or later on in life. So for a property valued at £200,000 with no current mortgage, this would equate to range from around £18,000 to £111,000, depending on the above criteria.
For buy to let equity release, there are a very limited number of lenders and options available, and as a result the rates and maximum loan to values are far lower.
Common myths surrounding equity release lifetime mortgages
Deciding whether you wish to release equity from your buy to let property is a big decision that you shouldn’t take lightly.
We are often faced with worried future applicants who have concerns regarding the ownership of their home, the burden of having to pay monthly instalments back, as well as the costs associated with applying for a larger mortgage.
More often than not, these worries can be put to rest and often come from ‘mortgage myths.’
Myth 1: You will longer own your property
Contrary to popular belief, equity release on a buy to let property does not affect the ownership of your property as long as you keep up with your contracted repayments. In the unfortunate but unlikely event that you are unable to repay your mortgage, your home can be repossessed, as it could with a standard mortgage.
Myth 2: You can’t release equity from your home if you have an outstanding mortgage
This is false. Provided that you pay off your existing mortgage balance – with either some of the equity you release or with other savings – then you may still be eligible for equity release on a buy to let property.
In fact, clearing a mortgage is one of the most popular uses of equity release – especially for those reaching the end of their interest only term with no other repayment strategy in place.
Myth 3: You have to receive the full amount of the loan at once
Not true. You do not have to receive the full amount as one lump sum if you choose not to and you can receive the loan in instalments to reduce the amount of interest you accumulate.
Many people choose to receive smaller amounts of their loan over a period of time as receiving a large amount of the loan at once could affect their pension and other benefits they be otherwise entitled to.
Releasing equity with bad credit
Adverse credit is a term used to describe a less-than-perfect record of repaying credit commitments. If you have adverse credit it could mean that you have negative payment information on your credit report. Examples of this include:
Low credit score
Debt management plans
We have spoken to many homeowners who have worried that adverse credit will affect their chances of being approved for a buy to let equity release mortgage.
Releasing equity on a buy to let with bad credit
If you are looking to raise capital borrowing on a normal buy to let mortgage, as a further advance with your current lender, a second charge with a new lender, or a portfolio mortgage, the lender will base a lot of their decision on your credit history.
Larger lenders and high street banks may reject your application as they have stricter criteria. However, there are lenders who will approve on minor defaults, and others where there’s a been a default on a secured loan, which is a severe type of default to have on your credit file.
Adverse credit and equity release lifetime buy to let mortgages
When it comes to lifetime mortgages, credit history is less relevant than it would be for someone who is borrowing as a normal mortgage and is required to maintain repayments, generally because the interest is rolled up and there are no payments to make! That said it can still play a part in the maximum loan to value released with many lenders.
Speak to a buy to let equity release expert
If you’re considering applying for an equity release mortgage, there are a range of lenders who will consider your application and help you through the process.
Every lender takes different criteria into consideration, whether you have adverse credit or multiple buy to let properties.
Because of the differentiating policies on what they do and don’t accept, it’s best to take advice from an experienced professional before applying to various lenders as this can affect your credit score.
We only work with qualified advisors we trust, so you can be assured that we’ll pass you on to a broker with experience.
If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
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