Releasing equity from a buy to let

Equity release from a buy-to-let property has emerged as an increasingly popular strategy for landlords seeking to expand their portfolios, fund renovations, or access cash for other personal or business needs. This flexible financial option allows property owners to unlock the capital tied up in their investment properties without needing to sell. However, like any financial decision, it’s essential to fully understand the process, implications, and potential risks involved.

The right choice will depend on individual circumstances, property value, market conditions, and personal financial goals. This guide will walk you through the key aspects of buy-to-let equity release, from understanding eligibility criteria and the process involved to exploring potential tax implications and the role of financial advisors in making an informed decision.

What is buy to let equity release?

Buy-to-let equity release refers to a financial product that allows you, as a landlord, to unlock some of the wealth tied up in your investment property without having to sell it.

It typically works like a loan, where the lender provides you with a lump sum or regular smaller payments based on the value of your property, which you then repay from the property’s sale when you die or move into long-term care. The property continues to be rented out, providing an income stream, while the equity release provides a lump sum or regular payments for the property owner to use as they wish.

This can be an attractive option for property owners looking to free up cash for various reasons, such as retirement, property improvements, or further property investments. However, as with all financial decisions, it is important to carefully consider the implications and potential risks, including potential tax implications and the impact on inheritance.

Is this the same as equity release?

While buy-to-let equity release and standard equity release (often used for the homeowner’s primary residence) share similar principles, they are not exactly the same. Both allow homeowners to unlock the equity tied up in a property, but they apply to different types of properties and can have different implications.

Equity release typically refers to schemes such as lifetime mortgages or home reversion plans on a homeowner’s primary residence and is aimed at homeowners aged 55 and over. The funds can be taken as a lump sum, regular payments, or a combination of both, and there are typically no monthly repayments. The loan, plus accrued interest, is repaid when the homeowner dies or moves into permanent long-term care.

Buy-to-let equity release, on the other hand, is specifically for rental or investment properties. It allows landlords to release some of the equity tied up in their rental properties, with the aim to use the released funds for various purposes such as further property investment, property maintenance, or supplementing retirement income.

In both cases, it’s essential to seek advice from a financial advisor who can provide guidance based on the individual’s specific circumstances.

Should I remortgage my buy to let to release equity?

Whether you should remortgage your buy-to-let property to release equity largely depends on your personal circumstances, financial goals, and current market conditions.

Remortgaging can be a strategic move for landlords. If you can secure a better interest rate or more favourable terms with a new lender, this could save you money in the long term.

Additionally, by remortgaging, you can release equity to reinvest in expanding your property portfolio, cover maintenance or refurbishment costs, or provide cash for other uses. Essentially, the property pays for itself.

Here are some key considerations:

Interest rates: If you can find a mortgage deal with a lower interest rate than your current one, remortgaging could be a cost-effective way to release equity.

Property value: If your property’s value has increased since you purchased it, remortgaging could allow you to access more capital.

Investment opportunities: If you see a promising property market and plan to expand your portfolio, remortgaging could provide the necessary funds.

Costs: Be aware of potential costs associated with remortgaging, such as early repayment charges on your current mortgage, broker fees, and legal costs.

Market conditions: Economic factors, including the potential for interest rates to rise, should be considered.

Long-term financial goals: Your decision should align with your long-term financial plans. For example, if you’re nearing retirement, taking on additional debt may not be advisable.

How does the equity release work with my buy-to-let mortgage?

Equity release on a buy-to-let property works similarly to a standard equity release but is specifically designed for landlords with rental properties.

When you release equity from a buy-to-let property, you’re taking out a loan against the value of the property. The amount you can borrow depends on several factors, including the property’s value, the amount of mortgage you already have on the property (if any), your age, and the lender’s criteria.

Here’s a general process of how it works:

Application: You apply for an equity release product, like a lifetime mortgage or a home reversion plan, on your buy-to-let property.

Valuation: The lender arranges for a professional valuation of your property. The amount of equity you can release will depend on this valuation and the existing mortgage (if any).

Loan amount: The lender will offer you a percentage of the property’s value minus any existing mortgage. This could be as a lump sum, regular payments, or a facility you can draw on as needed.

Repayment: Unlike a standard mortgage, you typically don’t make monthly repayments. Instead, the loan, plus accrued interest, is repaid when the property is sold. This is usually when you die or move into long-term care. Until then, you can continue to rent out the property and earn rental income.

Interest roll-up: Interest is ‘rolled up’ over the period of the loan. This means it’s added to the loan and accumulates over time, increasing the amount you owe.

Remaining equity: Any remaining equity after the loan and the rolled-up interest are paid off belongs to you or your estate.

Will I be eligible?

Eligibility for a buy-to-let equity release scheme depends on several factors, which can vary between different lenders and products. However, here are some general criteria you typically need to meet:

Age: You usually need to be a certain age, often over 55, although this can vary between lenders.
Property Value: Your property generally needs to meet a minimum value set by the lender.

Existing mortgage: If there’s an existing mortgage on your property, the amount you owe may need to be below a certain percentage of the property’s value.

Property type: Some types of property may not be accepted. Most lenders will accept standard construction properties that are in good condition.

Location: The property should typically be in the UK.

Tenant agreement: The property should be let under an Assured Shorthold Tenancy agreement or its equivalent in Scotland or Northern Ireland.

Property ownership: You need to be the legal owner of the property.

What are the best lenders for releasing equity from a buy-to-let property?

While it’s crucial to note that the best lender for releasing equity from a buy-to-let property depends on individual circumstances and market conditions, below are a few more lenders which have been recognised for their mortgage products. Please note that not all may offer specific buy-to-let equity release products, and you should verify this with each lender or through a financial advisor.

Santander: Known for competitive rates on various mortgage products.

Nationwide: Offers a variety of mortgage services, including buy-to-let mortgages.

HSBC: A global bank offering a range of mortgage products.

Barclays: Offers a variety of mortgage services, including buy-to-let mortgages.

NatWest: Provides a range of financial services, including various types of mortgages.

Halifax: A UK bank recognised for its mortgage products.

Virgin Money: Offers a range of financial services, including mortgages.

Metro Bank: Known for customer service and competitive mortgage rates.

How can I release equity from my buy-to-let property without selling it?

There are several ways you can release equity from a buy-to-let property without selling it. These methods essentially involve borrowing against the value of your property. Here are a few options:

Further advance from your lender: If you have a mortgage on your property and your property’s value has increased since you took out the mortgage, your lender might agree to lend you additional money. This is known as a further advance. The rate could be different from your current mortgage, and it is usually set up as a separate loan. You can use this extra money however you wish.

Secured loan: A secured loan, or a second charge mortgage, is another loan in addition to your existing mortgage. It allows you to borrow money while leaving your current mortgage in place. These loans are called ‘secured’ because they are secured against your property. The rates are generally higher than first-charge mortgages, but it can be a good option if your current mortgage deal has high early repayment charges.

Buy-to-let equity release with a lifetime mortgage: This is a long-term loan secured against the property where the loan and accrued interest are repaid when you die or move into long-term care. In the meantime, you can continue to rent out the property and receive rental income. This can provide a lump sum, regular income, or a combination of both, and you maintain ownership of the property.

Unsecured loan: Depending on the amount of equity you wish to release, and your income, you might consider an unsecured personal loan. However, this would generally only be for smaller amounts and would not technically be releasing equity from the property.

What are the costs associated with releasing equity from a buy-to-let property?

There are several costs associated with releasing equity from a buy-to-let property, and these will vary depending on the method you choose to release equity. Here are some common costs you may encounter:

Arrangement fees: These are the fees charged by the lender for setting up the loan. They can sometimes be added to the loan amount.

Valuation fees: The lender will require a professional valuation of your property to determine how much they’re willing to lend. You usually have to pay for this.

Legal fees: You’ll need to pay for legal services to handle the legal aspects of the equity release.

Early repayment charges: If you have an existing mortgage and you’re remortgaging or getting a further advance to release equity, you may have to pay an early repayment charge to your current lender.

Broker fees: If you use a broker to arrange your equity release, you’ll need to pay them a fee.
Interest: With most forms of equity release, you’ll need to pay interest on the loan. The rate will depend on the lender and the type of product.

Completion fees: Some lenders may charge a fee upon completion of the mortgage.

Advice fees: If you seek advice from a financial advisor, they will usually charge a fee for their services.

Exit fees: Some lenders may charge a fee if you repay the equity release loan earlier than planned.

Pros and cons of buy to let equity release

Releasing equity from a buy-to-let property can provide a valuable source of funds for various purposes. However, like any financial product, it has its pros and cons. Let’s take a look:

Pros:

Access to capital: The main advantage is the immediate access to capital, which can be used for a variety of purposes, such as investing in more properties, refurbishing existing ones, or supplementing income.

No monthly repayments: With buy-to-let equity release products such as lifetime mortgages, you typically don’t have to make monthly repayments. The loan and the interest are repaid when the property is sold.

Continued rental income: You can continue to rent out the property and receive rental income even after releasing equity.

Fixed interest rates: Many equity release schemes offer fixed interest rates, so you’ll know the exact cost over the life of the loan.

Cons:

Reduced inheritance: The loan and accrued interest are repaid from the sale of your property, reducing the inheritance for your beneficiaries.

Interest roll-up: The interest on an equity release loan is usually compounded, which can result in the debt growing quickly over time.

Early repayment charges: Some equity release plans may have hefty early repayment charges if you decide to repay the loan earlier than agreed.

Eligibility for means-tested benefits: The released equity could affect your eligibility for means-tested benefits.

Costs: There can be significant upfront costs, such as valuation, legal, and arrangement fees.

Are there tax implications for releasing equity from a buy-to-let property?

Releasing equity from a buy-to-let property can have tax implications, depending on how you use the released funds. Here are some key points to consider:

Income tax: The money you receive from releasing equity is a form of loan, so it’s not considered taxable income. However, if you use the released funds to generate income (e.g., investing in another buy-to-let property), any profit you make from this would likely be subject to Income Tax.

Capital gains tax: If you sell your buy-to-let property to repay the equity release loan, you might have to pay Capital Gains Tax on the profit you make from the sale above your annual exempt amount.

Inheritance tax: An equity release can reduce the value of your estate, which may reduce any potential Inheritance Tax liability when you pass away.

Stamp duty land tax: If you use the released funds to buy another property in England or Northern Ireland, you may have to pay Stamp Duty Land Tax on the purchase price. The rates are higher for additional properties. Scotland and Wales have different taxes for property purchases.

How much can I borrow from a buy to let equity release?

The amount you can borrow with a buy-to-let equity release, also known as a buy-to-let lifetime mortgage, depends on several factors:

Property value: The value of your property will directly influence the amount you can borrow. The higher the property value, the more equity you can release.

Age: The older you are when you take out the plan, the more you can typically borrow. This is because the lender estimates the loan duration based on life expectancy.

Property type: The type and condition of your property can affect the amount you can borrow. Some lenders may offer less on properties of non-standard construction or in poor condition.

Lender policies: Different lenders have different lending criteria and loan-to-value (LTV) ratios. The LTV ratio is the maximum percentage of your property’s value that a lender is willing to loan. For buy-to-let equity release, this could typically range from around 20% to 60%, but this can vary significantly between lenders and products.

Existing mortgage: If you have an existing mortgage on the property, this will need to be repaid either before or as part of the equity release process. The outstanding mortgage amount will therefore decrease the amount of equity you can release.

Can I release equity from a buy-to-let property if I have a bad credit history?

Yes, it is possible to release equity from a buy-to-let property even if you have a bad credit history. However, it may be more challenging, and you may face higher interest rates.

Lenders may see you as a higher risk if you have a poor credit history. As a result, they may offer you a lower loan-to-value ratio (meaning you can borrow less of your property’s value), and they may charge higher interest rates to offset the perceived risk. Some lenders specialise in dealing with borrowers with poor credit, but their terms may not be as favourable.

That said, lenders will also consider other factors in their decision. For example, they may look at your rental income, the value of your property, the equity in the property, and your age (in the case of equity release products like lifetime mortgages).

It’s always a good idea to speak with a mortgage broker or financial advisor if you have a bad credit history. They can help you understand your options and may be able to recommend lenders who are more likely to approve your application. They can also give you advice on how to improve your credit rating for future borrowing.

Lastly, it’s important to remember that all forms of borrowing should be considered carefully, especially if you have a history of debt or financial difficulties.

How can I protect my tenants when I’m releasing equity from a buy-to-let property?

Releasing equity from a buy-to-let property shouldn’t directly impact your tenants, especially if you continue to meet your obligations as a landlord. However, there are some considerations to keep in mind to ensure your tenants are protected:

Inform your tenants: Although you aren’t legally obliged to inform your tenants about your financial arrangements, it’s considered good practice to let them know if there will be changes that may affect them, such as property inspections by the lender.

Keep up with payments: If you’re taking out a remortgage or another loan and you’re unable to keep up with payments, the property could be at risk of repossession, which would impact your tenants. Make sure you’re confident in your ability to meet the new financial obligations.

Assured Shorthold Tenancy: Most buy-to-let properties are let on an Assured Shorthold Tenancy (AST) basis. Under this type of tenancy, the tenants have the right to live in the property without disturbance from the landlord. This right remains even if the property is repossessed, at least until the end of their fixed term.

Tenancy agreement: Ensure that your tenancy agreements are robust and protect the rights of your tenants. This includes their right to stay in the property for the agreed term, even if ownership of the property changes.

Landlord insurance: Having comprehensive landlord insurance can help protect you and your tenants from unforeseen circumstances, like property damage that could make the home uninhabitable.

Remember, maintaining open communication and treating your tenants fairly will go a long way in ensuring a smooth process when you’re releasing equity from a buy-to-let property.

Buy to let equity release specialists

Hiring a specialist for buy-to-let equity release can be very beneficial for several reasons:

Expert advice: Equity release is a complex financial product with potential long-term consequences. A specialist can help guide you through this complexity, ensuring that you fully understand the product, its risks and benefits.

Tailored solutions: A specialist can help identify the most appropriate equity release product for your unique circumstances. They can also tailor their advice to your specific needs, whether you are looking to invest in more properties, pay off debts, or finance major expenses.

Access to better deals: Equity release specialists often have access to exclusive deals that aren’t available directly to the public. They may also have relationships with a variety of lenders, including those who cater to more niche circumstances.

Regulation: Reputable equity release specialists are regulated by the Financial Conduct Authority (FCA), providing additional peace of mind. They are required to give advice that is in the best interest of their clients.

Time and effort: Searching for the best equity release product can be time-consuming. A specialist can save you this effort and can manage the process on your behalf, including completing applications and liaising with lenders.

Protection: If you take out an equity release plan following the advice of a specialist and it later turns out that the advice was unsuitable, you have the right to seek compensation.