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 UK¹. 

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 property.

Equity release funds can be used for virtually anything you’d want to spend the money on.

You can use equity release for the following properties:

• Transfer equity release funds into another property
• Buy a holiday home
• Use equity release for a buy-to-let property

It all depends on the plan you’ve taken out with your respective lender and the estimated value of your home at the time of enquiry. 

As if that’s not enough

Other factors determine if you can release equity for a second property: the years you’ve lived in the primary residence and what’s left to pay on your initial mortgage.

Can You Transfer Equity to Another Property?

Yes, you can transfer the equity tied up in your primary place of residence to purchase another property².

You must, however, follow the rules when buying a second property with your equity release.

If you transfer equity into another property, you must stay in your home for at least six months of the year after the approval date.

It also depends on the criteria of the new home you’d like to purchase, which your lender will stipulate to you as if you were buying a home for the first time.

There’s more

Your second home will undoubtedly cost more than the first due to the rise in property value.

It would also determine your next step in deciding what to do with your equity funds.

Can You Use Equity Release to Buy an Investment Property?

Yes, you can use equity release to buy an investment property or a holiday house as a second property³.

These options should be presented to you when initially discussing your plan with your lender.

Each equity release plan or mortgage is tailored to allow for these specific investments.

In some cases: if you remortgage your first home, also known as cash-out refinancing, you could use it as a down payment on an investment property or a holiday home.

How to Release Equity to Buy a Second Property?

You can release equity to buy a second property by consulting an equity release broker and then compare the current rates in the property market.

Once done, you need to determine the amount of equity that can be released from your primary home.

You’ll then need to calculate what’s required for the new home and if you’d need to use all the funds tied up in your property.

This is where you must consider if you need to sell up, downsize or if you can apply for the total amount and disregard any of the first 2 options.

How Does Equity Work When Purchasing a Second Home?

Purchasing a second home with equity release follows a straightforward process.

It’s crucial to remember these 4 points in the buying process:

1. Talk to a mortgage broker, lender, solicitor, or lawyer because getting the right advice will make the process faster and easier to understand.
2. Find out how much equity there is in your first property to use on your potential new property.
3. Understand the criteria for your next home and what’ll it be used for: are you buying a holiday home or buying to rent?
4. Find out if equity release is the best method of lending money for you.

Can You Borrow Money Against Your House to Buy Another Property?

Yes, you can borrow money against your home to buy another as an alternative option to using equity release. 

Bear in mind that this method is broadly considered a high-risk practice by most banks.

A preferred method is applying for additional borrowing from a lender and using this extra money on the second home as a down payment, much like equity release.

For any loan scheme, including equity release, you can inquire about a second mortgage from a new lender, as you could find their standards easier to adhere to than those of your initial lender.

You could refinance the entire first property with a new bank and use these funds to buy a second home.

How Much Equity Do You Need to Buy a Second Home?

The amount of equity needed to buy a second home depends on:

• The property being considered for purchase.
• The total equity of your first home.
• The total amount available to be released.

Furthermore, the bank will want to evaluate if you can pay both loans when taking out a second payment plan for an additional home.

Do You Need a Big Deposit for a Second Property With Equity Release?

No, you don’t need a big deposit for a second property with equity release.

Although, at least 20% of the new property value is required as a down payment to be approved⁴.

The loan-to-value (LTV) ratio that most banks work on is 20-80%. 

The buyer pays a 20% deposit, and the bank provides 80% of the property value⁵.

What’re the Risks of Using a Home Equity Loan to Buy Another House?

The risks in using an equity loan to buy another house are your primary residence is at risk, your interest rates can rise, and equity can rise and fall. 

Let’s look at all the details here:

Primary Residence at Risk

If you’re using your entire first property as collateral, it’s at risk of being repossessed.

If you fail to pay regularly and miss more than 1 payment, as agreed upon with your lender, they’ve got the right to seize your property.

Interest Rates Can Rise

If you choose to go with home equity lines of credit (HELOC), your interest rate will increase over time.

HELOCs have adjustable rates and will increase from time to time if the property value increases, which usually is the case in the property market.

Equity Can Rise & Fall

Equity can rise and fall, with the national average for home appreciation at 3% per year⁶. 

No market is stable, especially the property market. 

Even though it’s unlikely that property value will decrease in the future, they tend to because of something drastic.

Knowing when is the appropriate time to buy or sell is always vital.

Any impact on the property market can directly influence equity release, causing it to rise or fall.

There’s more

If there’s a decrease in the property’s value and you need to sell quickly for whatever reason, you could fail to pay back the borrowed amount.

If the property value falls below what’s owed to your lender, you’ll run at a loss because your loan amount to pay back is more than what the property’s worth at the time of the revaluation.

It’s highly recommended only to lend the required amount as a deposit and to never borrow over the amount needed as a down payment.

Pros & Cons of Using a Home Equity Loan to Buy Another House

The pros when using equity are increasing your deposit, lower interest rates, as well as standing a better chance of approval.

However, the cons are that your equity risk increases, there’re multiple loan repayments, and you’re required to pay closing costs.

Pros

Let’s take a closer look at the pros listed:

Increase Your Second Property Deposit

Equity release funding is regarded as the best loan scheme, as the funding received is far more than any other form of credit lending.

Depending on the funds available in your primary home, you could garner the whole deposit of 20% or more as a down payment on your second property.

Lower Interest Payments 

When using equity release as collateral, competitive interest rates are applied.

Lenders are more lenient in these cases and tend to offer lower rates than purchases made with less security.

Better Approval Chances

Banks and lenders are more willing to approve second-home purchases because they provide less risk.

Because banks see your primary residence’s value as a priority over the value of the second property you’re trying to purchase. 

Cons

Here are 3 cons to weigh up when using an equity loan to purchase another property:

Increased Equity at Risk (Negative Equity)

Negative equity occurs when the property value is less than the money owed to the lender and happens when there’s a decrease in property value.

Multiple Loan Payments

When already having 1 mortgage to pay off, make no mistake that you’ll have to pay the additional loan if you’re to purchase a second home.

It will be heavy on the pocket and cause a higher cost of living.

Paying Closing Costs

Any borrower will charge closing costs on your loan, and these closing costs typically range between 2% to 5%⁷.

You could end up paying 1000s every month in repayments because of the closing cost.

Some Important Questions to Consider When Buying a Second Home

Here are some important questions to consider when buying a second home:

• Is a deposit needed? 
• Do you run the risk of negative equity?
• Are there any stamp duty surcharges involved?
• Are you able to meet strict affordability requirements?
• Will there be maintenance costs?
• Do you need to consider consulting an equity release advisor?

What’re the Alternatives to Using Equity Release to Buy Another House?

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. 

Let’s explore the 4 alternatives to home equity loans even more:

Cash-Out Refinance

If you’re buying a second home, a cash-out refinance could be a better option than an equity loan.

This is because you could afford a better, if not the best, interest rate on your first home purchase rather than seeking a second loan on a new property with higher interest rates.

Home Equity Line of Credit

A home equity line of credit allows buyers more flexibility to use the funds as they see fit and when needed.

HELC enables the borrower to take out smaller amounts at a time over 10 years.

After that, the repayment plan is 20 years, but the lender will no longer be allowed to borrow funds against their credit line.

To qualify for a home equity line of credit, your property’s value, credit score, and debt-to-income ratio are considered.

Reverse Mortgage

Since the rule changes, reverse mortgages can only be taken out for your first home, but the lending proceeds may be used to help–and only help–purchase your second home.

It’s no longer the most common means of lending because of its downsides.

Home equity conversion mortgage (HECM) is the most common type of reverse mortgage. 

Some setbacks are the considerable loan fees and the high-interest rate you’d acquire with this method.

Cash Purchase

Cash buys are still the most straightforward way to buy a new home, and the old saying still stands: cash is king.

With this ancient method, you need to be strapped with cash and should’ve been saving for multiple years.

Paying cash for another property alleviates the pressures of loan repayments and bank charges while eliminating any hefty interest rates or additional costs.

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?