Are you 55 years old or older, and are you considering buying a second property with your equity release funds? 

You heard about the benefits of equity release and would like to be part of the 10% who own 2 properties in the UK.¹ 

Despite the knowledge you’ve gained from talking to friends and family, you’d still like expert advice and assistance on using the funds on another property.

Find out all there’s to know about using equity release to buy another property, read on…

Can You Use Equity Release to Buy Another House?

Yes, you can use equity release to buy another house, such as a second home, a buy-to-let property, or even a holiday home.²

How Equity Release Can Be Used to Buy Another House

Equity release can be used to buy another house by unlocking the value of your current property.

This can be done through a lifetime mortgage.

How it works:

• You can access a lump sum or drawdown facility by taking out a lifetime mortgage.
• These funds can be used to purchase another property outright or as a deposit for a mortgage on the second home.
• The loan is repaid when your primary home is sold, either after you pass away or move into long-term care.

Read on to find out about the pros and cons of this method.

What Types of Property Can You Buy Using Equity Release?

Equity release can be used to buy various types of property.

These include:

• Holiday Home: Purchase a second home for leisure and relaxation.
• Investment Property: Buy a property to rent out and generate rental income.
• Family Assistance: Help family members purchase their own home by providing financial support.

Rules to Keep in Mind

Equity release schemes, such as lifetime mortgages and home reversion plans, have specific residence requirements that can significantly influence whether using equity release to purchase a new house is a viable option.

The requirements are:

• Primary Residence Requirement: Equity release plans are typically only available for your primary residence, which must be your main home where you live for the majority of the year.
• Ownership and Occupancy Rules: To qualify for equity release, you must own the property outright or have a very small remaining mortgage, which will need to be paid off as part of the process. The property must be your permanent place of residence. You cannot use an equity release loan on a property you plan to vacate or convert to rental use. If your intention is to buy a new property to live in, you may need to ensure that the current home you release equity from meets all eligibility criteria (e.g., its value, condition, and location).
• Property Eligibility Criteria: Equity release providers have strict criteria for the type and condition of the home. For example, non-standard constructions (e.g., thatched roofs, timber frames) or homes in poor repair may not qualify. Some equity release lenders have geographic limitations, so your primary residence must be located in an area they cover. These criteria mean that not all homes are eligible for equity release. If your current home does not qualify, you may need to explore other financing options for buying a new house.
• Moving to a New Property: Many modern equity release products offer “portability,” meaning you can transfer the plan to a new primary residence if the new property meets the lender’s criteria. If you plan to use equity release to move to a new house as your primary residence, you need to ensure the new home qualifies under the lender’s rules. Non-standard properties or those of lower value might not meet the criteria, restricting your options.

The primary residence requirement makes equity release most suitable for those looking to stay in their current home while accessing funds, rather than those seeking to diversify their property holdings.

If the residence requirement complicates your ability to use equity release for buying a new house, alternatives such as remortgaging or downsizing may be more appropriate.

What Are the Benefits of Using Equity Release to Buy a New Property?

Using equity release to buy a new property offers several benefits over traditional financing methods, particularly for older homeowners in the UK.

Here are the key advantages:

• Access to Tax-Free Funds: Equity release allows homeowners aged 55 and above to unlock a portion of their property’s value as tax-free funds. These funds do not count as taxable income, enabling you to maximise the available amount for your new property purchase.
• No Monthly Repayments: Most equity release products, such as lifetime mortgages, do not require monthly repayments unless you choose to make them voluntarily. The loan and accrued interest are typically repaid when you pass away or move into long-term care, reducing financial strain during retirement.
• Retain Ownership of Your Current Home: Unlike downsizing or selling your home, equity release enables you to retain ownership and stay in your current property while using its value to fund a new property purchase.
• Flexibility in Fund Usage: Equity release funds can be used for various property types, including second homes, holiday homes, or buy-to-let investments. You can also choose between a lump sum or a drawdown facility, depending on your financial needs.
• Simpler Eligibility Criteria: Equity release does not involve affordability checks or strict income requirements, unlike traditional mortgages. This makes it accessible to retirees who may not meet income criteria for standard mortgage lending.
• Estate Planning Features: Many modern equity release plans include options like inheritance protection, ensuring a portion of your property’s value is safeguarded for your heirs.

While equity release has several benefits, it’s crucial to weigh its long-term implications.

Risks and Drawbacks

Using equity release to buy a new property comes with several risks and drawbacks that should be carefully considered before proceeding.

Here’s a detailed overview:

• Accumulation of Compound Interest: With most equity release products, such as lifetime mortgages, interest is compounded, meaning you pay interest on the initial loan and on previously accrued interest. Over time, this significantly increases the amount owed.
• Reduced Inheritance for Beneficiaries: As the loan balance grows owing to compound interest, the remaining equity in your property is reduced. This can greatly diminish the inheritance passed on to your family or beneficiaries.
• High Setup Costs: Equity release involves substantial upfront costs, including valuation fees, legal fees, and adviser charges. These costs can make the option less financially appealing compared to other financing methods.
• Potential Impact on State Benefits: Receiving a lump sum or regular payments from equity release can affect eligibility for means-tested state benefits, such as Pension Credit or Council Tax Reduction. The funds released are considered part of your savings, which might disqualify you from certain benefits.
• Loss of Future Borrowing Options: By using equity release to fund a second property, you may face restrictions on your ability to secure additional loans against your current home.
• Early Repayment Charges: If you decide to repay the equity release loan early, significant early repayment charges (ERCs) may apply. These charges vary between lenders and can make it costly to exit the plan prematurely.
• Limited Borrowing Capacity for Younger Homeowners: The amount you can borrow through equity release is based on your age and the value of your property. Younger homeowners (typically those under 70) may be restricted to smaller loan amounts, limiting the financial viability of buying a new property.
• Long-Term Financial Commitment: Equity release is a lifetime financial commitment, with repayment typically deferred until you pass away or move into long-term care. This lack of flexibility may not suit you if you anticipate significant changes in your financial circumstances.

While equity release offers a way to purchase a new property, its risks and drawbacks, including compounded debt, reduced inheritance, and the impact on benefits, require thorough consideration.

Consulting a financial adviser registered with the Financial Conduct Authority (FCA) is essential to evaluate whether this approach aligns with your financial goals and long-term needs.

Practical Steps for Using Equity Release to Buy a New Property

Using equity release to fund a property purchase requires careful planning and informed decision-making.

Here are the steps.

1. Valuing Your Current Property

The amount of equity you can release is directly linked to the value of your current home.

An accurate valuation ensures you have a clear understanding of your financial potential and sets realistic expectations for how much you can unlock.

What to do:

1. Arrange for a Professional Valuation: Most equity release providers will require an independent valuation of your property to determine its current market value. This valuation is often arranged by the provider and conducted by a qualified surveyor.
2. Review Recent Sales: Consider looking at recent sale prices of similar properties in your area as a benchmark for your home’s value. This can help you understand whether the surveyor’s valuation aligns with market trends.
3. Factor in Property Condition: Keep in mind that the condition of your home can impact its valuation. If necessary, consider making minor repairs or improvements to enhance its market appeal before applying for equity release.

2. Assessing How Much Equity Can Be Released

The amount of equity you can release depends on several factors, including your age, the value of your property, and the type of equity release plan you choose (e.g., lifetime mortgage or home reversion plan).

How to Assess Potential Equity:

1. Use an Equity Release Calculator: Many providers offer online tools to estimate how much equity you could release based on your age and property value. While not definitive, these calculators provide a useful starting point.
2. Consider Your Financial Goals: Determine how much money you actually need and for what purpose. Releasing only the necessary amount helps preserve more of your home’s equity for future needs or inheritance.
3. Account for Loan-to-Value Ratios: Most providers impose a loan-to-value (LTV) cap, which limits the percentage of your property’s value you can release. For instance, younger borrowers may be eligible for a lower LTV, while older borrowers can release more.
4. Get Professional Advice: Consulting a qualified equity release adviser is crucial. They can provide personalised advice on how much equity you can safely release without jeopardising your long-term financial security.

3. Selecting the Right Equity Release Provider

The provider you choose will determine the terms of your equity release plan, including the interest rate, repayment options, and flexibility to make partial repayments or transfer the plan to a new property.

Choosing the right provider ensures you get the most suitable product for your needs.

How to Select a Provider:

1. Research Providers: Look for providers who are members of the Equity Release Council (ERC), as they adhere to industry standards that protect consumers, such as the No Negative Equity guarantee.”
2. Compare Interest Rates and Fees: Different providers offer varying interest rates and may charge additional fees for setting up the plan. Comparing these costs can help you find the most cost-effective solution.
3. Evaluate Flexibility: Some providers allow you to make penalty-free partial repayments, which can help manage the accumulation of interest over time. Ensure the plan you choose includes this option if it suits your financial strategy.
4. Check for Portability: If you plan to move home in the future, choose a provider that allows you to transfer the equity release plan to a new property, subject to eligibility criteria.
5. Work with a Trusted Adviser: An experienced equity release adviser can help you navigate the market, compare providers, and select a plan that aligns with your goals. They can also ensure you fully understand the terms and implications of your chosen product.

By following these practical steps, you can approach equity release with greater confidence and clarity.

Valuing your property accurately, assessing how much equity can be released, and selecting the right provider are critical stages in ensuring equity release works effectively for your needs while safeguarding your financial future.

Things to Remember When Buying a Second Property

When buying a second property in the UK, there are several important factors to consider.

These include:

• Stamp Duty: Second homes incur a stamp duty surcharge of 5% on top of the standard rate.³ This can significantly increase the upfront cost of purchasing a second property.
• Deposit Requirements: Lenders typically require a larger deposit for second homes, often between 15% and 25% of the property’s value.⁴
• Capital Gains Tax: If you sell a second home for more than you paid for it, you may be liable for capital gains tax on the profit.
• Maintenance Costs: Owning a second property comes with additional maintenance and upkeep costs. It’s important to budget for these ongoing expenses.
• Insurance: Ensure you have appropriate insurance coverage for your second property, including buildings and contents insurance.⁵
• Legal Fees: Factor in the cost of legal fees for the purchase process, including conveyancing and any other associated costs.

By keeping these considerations in mind, you can make a more informed decision when purchasing a second property.

What Are the Alternatives to Using Equity Release When Buying a Second Property?

There are several alternatives to using equity release when buying a second property.

These include:

• Downsizing: Selling your current home and purchasing a smaller, less expensive property can free up capital for buying a second property.
• Remortgaging: Refinancing your existing mortgage to release equity can provide funds for a second property without the need for equity release.
• Personal Loans: Taking out a personal loan or a secured loan against your property can provide the necessary funds, though this will require regular repayments.
• Savings and Investments: Using existing savings or investments can provide the required funds without racking up any debt.
• Family Assistance: Receiving financial support from family members can be an alternative, allowing you to avoid borrowing against your home.
• Government Schemes: Exploring government grants and schemes designed to support homeowners can provide financial assistance without the need for equity release.
• Renting Out a Room: Generating additional income by renting out a room in your home can help cover expenses without selling or borrowing against your property.

These alternatives can provide financial flexibility and support without the long-term implications of equity release

The alternatives to using equity release to buy another home are cash-out refinancing, home equity line of credit (HELC), reverse mortgages, and cash buys. 

Employee Engagement in Social Responsibility

Equity release institutions encourage employee engagement in social responsibility initiatives through volunteering programs.

When employees volunteer their time and skills, they contribute to positive social change, aligning with the company’s mission and values.

Common Questions

In Conclusion

It’s essential to know and understand your financial status when buying a big-ticket item, especially a second home.

With the property market fluctuating continuously, it’s advisable to do the proper research and seek the advice of experts to allow for a smooth process.

You must choose a plan that suits your needs and ask yourself: would it be best to use your equity release to buy a second property?