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Buy-to-Let and Equity Release

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 11th February 2020 *

Landlords with buy-to-let mortgages often find it useful to be able to release equity from one or more of their rental properties, for a variety of reasons.

This article takes a closer look at buy-to-let equity release, and explains the different ways to release equity from a buy-to-let property or a portfolio of properties.

Read on for a comprehensive overview or click a link to jump straight to the information you want:

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Releasing equity vs. Equity release

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“ is the term used when you borrow money against equity in a property. This can be done via a number of different ways, which we discuss in this guide.

“Equity release” is the industry term for a lifetime mortgage which is a mortgage product designed for people over 55. Equity release allows a homeowner to take money from their property and allow the interest to 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. This is because raising capital can help with a deposit on a new buy-to-let property, paying the costs of property maintenance or improvements which may serve to increase the amount of rent you can get from your rental properties.

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 available options:

  • Remortgage to raise capital: By remortgaging to raise necessary capital you repay the current mortgage (if there is one) and borrow the extra cash, which gets paid into your account. For example, if 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.
  • Further advance with the same lender: Your current mortgage provider lends more money on top of your mortgage, usually as a second mortgage product. 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.

Although most lenders will limit the amount you can borrow against a rental property, it’s possible to borrow money by using the equity in your buy-to-let as collateral. You should expect the loan to value ratio to be capped at between 65% and 80% and you may find that some lenders will place restrictions on what the funds you’re borrowing can be used for. For instance, most will let you use the capital to pay a tax bill or buy another property, but you might struggle if the funds are to pay for your next holiday.

  • Secured loan: 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 due to a fixed rate period or a rate that’s too good to walk away from.
  • Portfolio remortgage: If you have multiple properties, you can secure a single mortgage over all of them. Doing things this way can sometimes 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. Be sure to factor in capital gains and other taxes and fees.

Equity release and lifetime mortgages on buy-to-let properties

Retirement can sometimes be a daunting prospect, especially with increasing living costs and the thought of having to adjust to having less income to do all the things you've wanted to do whilst working.

Retirement should be enjoyed. 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.

However, for many over 55's it can be particularly frustrating when they find themselves asset rich but cash poor. Which is why increasing numbers of people are choosing to unlock some of their wealth through releasing equity on buy-to-let property.

As more and more people are turning to equity in their second properties as an important source of income, equity release has been growing at an incredible rate over the last few years.

First of all, let’s break things down and explain equity release in relation to lifetime mortgages.

What is equity release?

As we touched on earlier, equity release most often takes the form of lifetime mortgages. With this kind of equity release, lenders take a charge over your property and release the money to you as either a cash sum, a regular income or a combination of the two.

Rather than having to be repaid monthly, interest payments are either rolled up or added to the equity loan. The loan is repaid when you die or go into care, usually through the sale of your property by your family or estate.

Guidelines set out by the equity release council dictate that if the sale of the property does not cover the full amount of the debt, this cannot be chased or claimed from the estate.

How does this type of equity release work?

If you want to release equity from your property, whether it’s your main residence or a buy-to-let property, how much you can borrow will depend on:

  • The value of your property
  • Your age
  • Your health at the time you apply for an equity release mortgage

Buy-to-let equity release allows landlords who are letting out their property to release equity, which can be used for their retirement, renovating their rented property or for any other worthwhile purpose, without putting up their own main residence as collateral.

As with equity release schemes on main residential properties, buy-to-let equity release schemes of this type are only available to people over the age of 55. You can take the money you release as a lump sum, in several smaller amounts or as a combination of both.

How much equity can I release?

Most lenders have simple but different equity release calculators for buy-to-let properties. In general, they’ll calculate the maximum amount you can release from your property using a percentage of the value of the property 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 healthy people aged 55, increasing to 55.5% for those unwell or more advanced in age. For a property valued at £200,000 with no current mortgage, this sum you could release would range from around £18,000 to £111,000, depending on your own property value and circumstances at the time of your application.

There are a very limited number of lenders and options available for buy-to-let equity release, as a result the rates and maximum loan to values are far lower. To find the best rates you could achieve get in touch and speak to one of the expert whole-of-market brokers we work with. They will be able to search the whole market and find the lender offering the best terms for your individual circumstances.

Dispelling equity release myths

Deciding whether to release equity from your buy-to-let property is a decision which shouldn’t be taken lightly. The important thing to remember when considering any type of equity release is to get a clear idea of what you’re committing to and how this might impact you, or your family, in years to come.

Many people considering equity release have worries that can be put to rest quickly and easily as they often come from ‘mortgage myths’, such as:

Myth 1: You'll no longer own your property

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 event that you are unable to repay your mortgage, your home can be repossessed, as it could with a standard mortgage.

This event should be an unlikely occurrence as any lender affecting an equity release mortgage on a buy-to-let should make checks to ensure this cannot easily happen.

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 without an adequate 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 installments 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
  • Late payments
  • Mortgage arrears
  • Defaults
  • CCJs
  • Debt management plans
  • IVA
  • Bankruptcy
  • Repossession

Many borrowers in circumstances where they have bad credit on their files worry that it will have a negative affect on their ability to get approved for a buy-to-let equity release mortgage. But, in some cases, it’s quite possible to find a lender willing to help.

Releasing equity on a buy-to-let with bad credit

If you’re 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 much 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 been a default on a secured loan, which is one of the most severe types of default to have on your credit file.

When it comes to lifetime mortgages, credit history is less relevant than it would be for someone who is seeking to borrow a normal mortgage, requiring them to maintain repayments, because there are no payments to make due to the interest being rolled up. Credit history, however, does still influence the maximum loan to value you may be able to release, which is why it pays to shop around for the best deal.

Which is where using a whole-of-market mortgage broker, like those we work with, can help…

Speak to an 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 lenders as this can affect your credit score.

We only work with qualified advisors we trust, so you can rest assured that we’ll pass you on to a broker with the right experience. Call 0808 189 2301 or make an enquiry here for a free, no-obligation chat and we’ll match you with a broker who can help.

Updated: 11th February 2020
OnlineMortgageAdvisor 2020 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info 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. Some types of buy to let mortgages are not regulated by the FCA. 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. Equity released from your home will also be secured against it.

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