Equity release on buy to let properties
Taking out equity release on buy to let property gives you the option of repaying your existing mortgage whilst continuing to benefit from the rental income it provides. As an equity release mortgage has no monthly repayments your outgoings will reduce, leaving you to take advantage of rental properties full potential.
However, arranging an equity release mortgage on a buy to let property is not the same as remortgaging to release equity from your home. Whilst remortgaging lets you unlock some of the capital tied up in your property, equity release is a specific type of later life mortgage for people aged 55 and older.
So, it’s important to understand how equity release works before deciding on this option for your buy to let property.
What is equity release?
Equity release is a loan that is secured against your property in return for a tax free cash sum. The difference with a lifetime mortgage, which is the most popular type of equity release is that there are no monthly repayments. Instead, the loan and interest are repaid once the property owner has died or moved into long-term care.
Can I get equity release on a buy to let property?
Whilst the majority of lifetime mortgages are for residential properties, landlords can get equity release on a buy to let. There are fewer companies to choose from and their lending criteria is more stringent, however they are available.
Once the money has been released, it can be used to repay your buy to let mortgage. Any remaining cash can be used however you choose.
Unless you choose to repay some of the interest, there are no repayments to make. Compound interest is added to the loan and only repaid once you have died or moved into residential care. At this point your tenant will be required to leave your property as it will be sold to repay the debt.
With buy to let equity release you never have to worry about the debt being greater than the value of your property, as you are protected by the Equity Release Council’s no negative equity guarantee. You just need to check that your lender is a member of the ERC.
However, as the loan is repaid from the sale of your rental property, it will reduce the value of your estate and any inheritance you leave to family.
How much equity can you release with a buy to let lifetime mortgage?
The amount of equity you can release as a landlord with a buy to let lifetime mortgage depends on your age and the value of your property. As with equity release on residential properties, the older you are, the more you can borrow.
It’s also likely that the maximum percentage you can borrow of the property value will be less than a residential only use. Therefore, when looking at equity release calculators make sure it’s a specific equity release buy to let calculator.
Each company will have their own lending criteria but in general you should expect the following:
Eligibility criteria for equity release on rental properties
- You need to be at least 55 years of age
- Have sufficient equity in your property
- Have an assured shorthold tenancy agreement in place
In addition, there should be a tenant in place, the property must not be sublet and the rental should be for single occupancy only.
Alternatives to buy to let equity release
Arranging equity release on a rental property is a big decision, so its important to seek advice from a specialist broker or IFA. A lifetime mortgage could be a good way of freeing up some extra cash, but there are some alternatives to buy to let equity release that you may want to consider first:
Rather than getting a lifetime mortgage, you could simply remortgage to release the equity. By remortgaging, you can either free up extra cash or move to a better interest rate with lower monthly payments. You will of course, need to qualify for a mortgage and have sufficient equity in the property.
Get a further advance on your existing mortgage
Alternatively, you could ask your current lender to increase your existing mortgage to free up the extra cash. This will mean you are tied to their rates, so you may want to compare this to remortgaging to a new lender before making a decision.
A secured loan
You could get a secured loan against the property which is essentially like getting a second mortgage. You will need to demonstrate affordability and of course be comfortable with the increase in your monthly outgoings.
Sell the property
If you are in need of extra money, you could consider selling your rental property. In addition to freeing up the extra cash, you would also be free of the maintenance and upkeep worries that go hand in hand with being a landlord and owning a buy to let.
It really depends on your personal circumstances and requirements, which is where professional advice from the experts will help.
Equity release is a big decision, so it's important to be certain it's right for you.
To help you understand more about equity release, we work in association with Age Partnership. Their specialist advisers will be happy to answer your questions and provide you with more information.
Their initial advice is completely free of charge and there is absolutely no obligation to proceed.
You can request a call back here or call 0800 133 7656 for an immediate discussion.
Alternatively you can find details for other specialist brokers, IFAs and providers on the Equity Release Council’s ‘find a member’ website.
If you prefer to understand more about lifetime mortgages before speaking to someone, take a look at our guide to equity release.
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