Written by Emma
August 14, 2024
Equity release is a great solution for homeowners who need to free up money to purchase a second property. As a homeowner, you may have accumulated equity on your house after years of mortgage repayment that you are unable to access unless you remortgage to release it.
Below we will explain what equity release is and how it can assist you with purchasing another property.
Equity release is a low-cost and effective way to fund the purchase of another property .
Releasing Equity
Buying a house is often seen as a long-term commitment, but it doesn’t have to be, even though it is a significant financial choice. Not only is buying another house an achievable possibility, but renting out your first residence can help you pay for your new home loan, or selling your first residence can assist you in obtaining it.
You can convert the value of your property into cash by releasing equity. This you can accomplish through a variety of policies that enable you to access, or “release,” the equity (cash), attached to your house. In order to achieve this, you do not need to have paid off your mortgage in full.
You have the option to withdraw the funds in one large amount, gradually smaller sums over time (a process called drawdown), or a mix of the two.
It provides access to the property’s true value, which is tax-free and can be used for several things, including long-term care plans for seniors, house repairs, large purchases, emergencies related to health care, retirement planning, etc.
Types of Equity Releases
There are two main types of equity releases:
- Lifetime mortgages
- Home reversion plans
Understanding Lifetime Mortgages
This is a kind of equity release that’s often reserved for those over 55. This tax-free loan is backed by your house. You won’t have to move, and you’ll still be the owner of your house. This loan doesn’t require you to make monthly repayments (unless you want to) and doesn’t have a fixed term.
It continues until you die or enter long-term care, the loan and any associated interest will then be paid back from the sale of the property. Remember that there will be less money from the sale to leave for your loved ones if you pay off the debt.
Types of lifetime mortgages:
Interest Roll Up Lifetime Mortgages:
Ideal for those who desire flexibility yet do not wish to pay interest on a regular basis.
They let you to take out your money in multiple smaller amounts or as a large, tax-free lump payment without having to pay interest each month because any overdue interest is added to your loan, and the total amount you owe may increase rapidly.
Optional Payment Lifetime Mortgages:
For those who are willing to pay interest on a monthly basis and who desire flexibility, cover all or part of the monthly interest on your loan while allowing you to take out your money in one large, tax-free lump sum payment or multiple smaller ones. You won’t be able to add interest to your debt, so it will either increase slowly or not at all.
Payment Term Lifetime Mortgages:
This mortgage also works for people who wish to pay back interest. You get a tax-free lump sum of cash, and it’s only available to those over 50. If you are employed, you will continue to pay interest each month until you retire or turn 75.
You can continue to make contributions if you’re already retired, up to the age of 75. Following that, the loan’s interest is added. While paying the interest lowers the total cost of the loan, your home may ultimately be repossessed if you fall behind on your monthly payments.
Understanding Home Reversion Plans
A home reversion plan is a type of equity release usually for people aged 60 and over. It lets you sell between 25% and 100% of your home for cash. You can get the money as one big lump sum or smaller regular payments. In practical terms, it’s like becoming a tenant in a home you used to own, but without paying rent.
Your provider will sell your house and collect their portion when you pass away or enter long-term care. However, you will never be required to repay more than your house’s worth.
Home reversion plans and lifetime mortgages are two entirely separate products.
Remortgage to Buy Another Property
Refinancing your mortgage is often done when you purchase a second property, either as an investment on a buy-to-let basis or because you have a good reason to own a second house. Your first home’s equity should be able to be used toward the purchase of a second one.
The most common reasons for a second property are the following:
Becoming a landlord
Remortgaging one home could release cash for the purchase of another, which is something you could be seeking to do if you want to start renting out properties and become a landlord.
Letting go of your current house and moving into a new one you buy after remortgaging is one possibility.
Alternatively, you might continue to live in your present home and refinance it to purchase a rental property. This provides you with a variety of options to think over, including a mortgage for vacation rentals.
Buying a second home
To avoid a daily commute, you might require a smaller home in the city, wish to consider helping retiring parents, or have your own family vacation property. One way to fund the purchase of a second home with a separate residential mortgage is by refinancing your primary residence.
Buying a commercial property for business use
Many lenders will consider a remortgage with that in mind if you are wanting to invest in real estate for your business.
Requirements for Remortgaging to Buy a Second Property
Lenders consider several factors before granting you a remortgaging loan; the following are some of the more important ones:
Your Credit Status
Your mortgage offers may be significantly impacted by your credit history. It is strongly advised that you check your credit score before applying.
Your Current Property Equity
When it comes to remortgaging a house, there are two primary possibilities. Either get a second mortgage as a separate loan secured by the same home or get a full remortgage, which completely replaces your first mortgage.
How likely you are to be accepted will depend on your approach and the importance of each feature.
Your Income
When deciding whether to grant you a loan, lenders will always consider your income. But this doesn’t necessarily refer to your base pay alone. Lenders frequently consider benefits and consistent job bonuses when evaluating your revenue.
You may require a specialized mortgage if your income is complex, such as from corporate dividends or bonuses.
Your Lenders
Lenders consider your expenses in addition to your income.
In order to assess how much you can truly pay, they will need to know how much your regular spending are depleting your income.
This is particularly crucial if you’re thinking about getting a second mortgage or refinancing because the payments on a second mortgage increase your overall financial commitment.
At Bridging Finance, we work with experienced and established lenders who ensure your deal is structured correctly from the start and provide our expertise to ensure the deal works.
Start the process by submitting a free initial inquiry to us or call us on +44 011 63666339 to speak to one of our experts.
Why Us?
—
→ Fast Completions
→ Best Rates
→ Flexible Bridging loans
→ Open 7 days a week
Related Articles
Bridging Finance Broker – Do you need one?
Understanding what a bridging finance broker is, is necessary before deciding whether or not you should use their services. In the article below we will cover all you need to know about Bridging finance brokers as well as bridging finance to ensure you are able to...
Bridging Finance for Property Development
Bridging finance for property development can get your development projects underway quickly, helping you to start or complete a project. Bridging finance is a short-term funding solution that allows you to not miss out on any development opportunities. In this...
How Long Does The Bridging Loan Process Take?
The bridging loan process isn't as daunting as it may seem. Bridging loans are a quick and easy option to get short-term financing. This type of financing can be utilized for a variety of tasks, such as ending a chain of house purchases, property auctions, remodelling...