How Homeowners Can Release Equity to Buy Another Property

So you're sitting on a property that's gone up in value over the years, and you're thinking about tapping into that wealth to buy another place. It's a thought that crosses many homeowners' minds, especially when property prices have been climbing and you've built up a decent chunk of equity in your home.

The good news is that releasing equity to fund another property purchase is definitely possible, and it's becoming an increasingly popular strategy for expanding property portfolios or helping family members get onto the property ladder.

Whether you're looking at investment opportunities, wanting a holiday home, or planning to help your children buy their first place, understanding how equity release works for property purchases can open up some interesting possibilities. Here’s everything you need to know before moving forward.

What Is Equity Release And How Does It Work?

Equity release essentially means accessing the money tied up in your property without having to sell it. Think of it as revealing the value that's been building up in your home over the years. If your property is worth £400,000 and you've got £150,000 left on your mortgage, you've got £250,000 in equity sitting there.

The basic mechanics are fairly straightforward. You can either remortgage your current property for a higher amount than you currently owe, or if you're 55 or older, you might consider a lifetime mortgage. With remortgaging, you're essentially borrowing more against your property and using that extra cash as a deposit or even the full purchase price for another property.

What makes this particularly attractive is that you're using money that's already yours in a sense, it's just locked up in bricks and mortar. You're not depleting your savings or liquidating investments: you're leveraging an asset you already own. The process typically involves getting your property valued, applying for the increased borrowing, and then having those funds available for your next purchase.

Of course, you'll need to prove you can afford the increased monthly payments on the larger mortgage. Lenders will scrutinise your income, outgoings, and the potential rental income if you're buying a buy-to-let property.

Types Of Equity Release For Property Purchase

Remortgaging Your Existing Property

Remortgaging is by far the most common route for releasing equity when you want to buy another property. You're essentially switching to a new mortgage deal that lets you borrow more than your current outstanding balance. Say you owe £200,000 on a property worth £500,000, you might remortgage for £300,000, giving you £100,000 to put towards another property.

The beauty of remortgaging is that you often get access to better interest rates than you'd find with other forms of borrowing. You might even find that even though borrowing more, your monthly payments don't increase dramatically if you secure a particularly competitive rate. Many lenders offer specific products for this purpose, and some even have special rates for customers looking to expand their property portfolios.

Timing can be essential here. If you're coming to the end of a fixed-rate period anyway, it's the perfect opportunity to release equity without incurring early repayment charges.

Lifetime Mortgages And Second Properties

For those aged 55 and over, lifetime mortgages offer a different approach to accessing property wealth. Unlike standard mortgages, you typically don't make monthly repayments; instead, the interest rolls up and gets paid when you die or move into long-term care.

While lifetime mortgages are usually marketed for home improvements or supplementing retirement income, they can be used to purchase additional property. The amount you can release typically ranges from 20% to 60% of your home's value, depending on your age. The older you are, the more you can access.

But here's where it gets a bit complex: using a lifetime mortgage for property investment requires careful consideration. The compound interest can eat significantly into your estate's value over time, and some providers have restrictions on using the funds for property purchases. You'll definitely want specialist advice before going down this route.

Eligibility Requirements And Lending Criteria

Lenders apply strict checks before approving equity release for another property purchase. Understanding these requirements can help you prepare and improve your chances of approval.

• Income assessment: Lenders will review your ability to afford both your current and new mortgage payments. Typically, total mortgage payments shouldn’t exceed 40–45% of your gross income.

• Credit history: A strong credit profile is crucial. Missed payments, defaults, or County Court Judgments (CCJs) can limit your options or push you toward higher-rate specialist lenders. Even multiple credit applications within a short time can raise concerns.

• Loan-to-value (LTV) ratio: Most lenders cap borrowing at 80–85% of your property’s current market value. For example, if your home is worth £300,000 and your existing mortgage is £200,000, you could typically access up to £55,000 in equity.

• Age considerations: While there’s no strict maximum age for mortgages, lenders prefer borrowers who can demonstrate reliable income through retirement. Pension payments, investment income, or rental income from the new property may all count toward affordability checks.

• Property type and use: The kind of property you plan to buy affects eligibility. For buy-to-let purchases, expected rental income usually needs to cover 125–145% of the mortgage payments. Some property types, such as ex-council homes or flats above shops, may have additional lending restrictions.

Meeting these criteria improves your chances of approval and ensures the borrowing remains manageable in the long run. Taking time to prepare your finances and documentation can make the process much smoother.

Financial Implications And Tax Considerations

The financial implications of releasing equity extend well beyond just the monthly mortgage payments. You're looking at arrangement fees for the new mortgage, which can run into thousands of pounds. Valuation fees, legal costs, and potentially early repayment charges on your existing mortgage all add up. Budget at least £2,000-£3,000 for the remortgaging process alone.

Then there's stamp duty on the new property. If it's a second home or buy-to-let, you'll pay an extra 3% on top of standard rates. On a £250,000 property, that's an additional £7,500 straight off the bat.

Rental income from a buy-to-let gets taxed at your marginal rate, and you can no longer offset all mortgage interest against rental income for tax purposes. Instead, you get a 20% tax credit, which significantly impacts higher-rate taxpayers. If you're earning £50,000 from your job and £10,000 in rental profit, you're paying 40% tax on that rental income.

Capital gains tax is another consideration. When you eventually sell the second property, you'll owe CGT on any increase in value. Currently, that's 24% for higher-rate taxpayers on residential property gains.

Impact On Inheritance And Estate Planning

Releasing equity fundamentally changes what you'll leave behind. Every pound you borrow against your main residence reduces your children's inheritance. With a lifetime mortgage, the compound interest effect can be dramatic. Borrowing £50,000 at age 60 could easily grow to £150,000 or more by the time the property is sold.

Your estate planning needs updating, too. The second property becomes part of your estate, potentially pushing you over the inheritance tax threshold. While property can be a good investment for passing on wealth, the additional stamp duty and ongoing costs mean you need significant capital growth to come out ahead.

Consider setting up trusts or making the property purchase through a limited company if inheritance planning is a priority. These structures can offer tax advantages but come with their own complexities and costs.

Alternative Options To Access Property Equity

Releasing equity isn’t your only route to raising funds from your property. Here are several alternatives worth considering before committing to an equity release plan:

• Second charge mortgages: A secondary loan secured against your property, ideal if you’re on a good rate with your current mortgage. Rates are usually higher than a remortgage, but this option can still save money if early repayment charges are steep.

• Bridging loans: Designed for short-term needs, these loans can help if you’ve found a property to buy before releasing equity. They come with higher costs (typically 0.5–1.5% monthly) but can be useful for quick transactions or auction purchases.

• Partnership mortgages: A growing option for those buying with friends or family. This setup reduces the individual financial burden and deposit requirement, but it’s crucial to have a clear legal agreement outlining everyone’s responsibilities.

• Guarantor mortgages: If your goal is to help a child buy a property, acting as a guarantor may be simpler than releasing equity. You back their mortgage without providing a deposit, but your property may be at risk if payments are missed.

• Peer-to-peer or crowdfunding investments: These platforms allow you to invest or raise funds without tapping into your property equity directly. While not traditional mortgages, they can offer access to capital for property ventures.

Before choosing a path, it’s best to compare options carefully. Mortgage Connector can help match you with brokers experienced in these alternative financing routes, so you can make a fully informed decision.

Conclusion

Releasing equity to buy another property can be a smart financial move, but it's not a decision to rush into. Your success hinges on careful planning around the true costs involved, from arrangement fees and stamp duty to the long-term impact on your monthly budget and inheritance plans. The tax implications alone can significantly affect your returns, especially with recent changes to buy-to-let taxation.

Before pulling the trigger, get your numbers straight. Calculate not just whether you can afford the increased payments, but whether the investment makes sense given all the costs and risks involved. Property can be a fantastic investment, but leveraging your home to buy another property doubles your exposure to the property market.

Professional advice isn't optional here; it's essential. A good broker can help you navigate the complex lending criteria, find the best rates, and potentially save you thousands over the life of your mortgage. They'll also help you understand whether equity release is genuinely your best option or if alternative financing methods might better suit your needs.

Frequently Asked Questions

How much equity can I release to purchase a second home?

Typically, lenders allow you to borrow up to 80-85% of your property's value when remortgaging. For example, if your home is worth £300,000 and you owe £200,000, you could potentially release up to £55,000 for another property purchase, subject to affordability checks.

What are the tax implications of buying a second property with released equity?

You'll pay an additional 3% stamp duty surcharge on second homes or buy-to-lets. Rental income is taxed at your marginal rate with only a 20% tax credit for mortgage interest. When selling, you'll owe capital gains tax at 24% for higher-rate taxpayers on any profit.

Is releasing equity better than getting a buy-to-let mortgage?

Releasing equity through remortgaging often offers lower interest rates than buy-to-let mortgages, potentially making it more cost-effective. However, it increases the debt on your main residence. Buy-to-let mortgages keep your properties financially separate but typically require a 25% deposit and have stricter lending criteria.

What happens to my monthly payments when I release equity?

Your monthly mortgage payments will increase as you're borrowing more against your property. Lenders ensure your total mortgage payments don't exceed 40-45% of your gross income. However, securing a competitive rate during remortgaging might mean payments don't increase as dramatically as expected.