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Equity release on buy-to-let: what you need to know

Find out how you can extract tax-free cash from your rental property using equity release.

Summary

  • Equity release on a buy-on-let property allows homeowners and landlords to release funds from their property. 

  • There are multiple different types of equity release models.

  • There are pros and cons to using equity release on buy-to-let properties .

  • You can consider alternatives to equity release on buy-to-lets.

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What is equity release for a buy-to-let property?

If you own a rental property and need money for retirement, home improvements, or an investment, you can release equity from it with the help of a professional mortgage broker. 

Equity release on a buy-to-let property is a process in which a homeowner releases equity, either as a lump sum or in regular payment instalments, from the property that they own.  

If you are a landlord who has invested in a property that is rented or let out to tenants, you may have sizable portions of equity tied up in your property that qualify for release under the right conditions.

This equity is typically released by remortgaging to free up capital

For example, a homeowner may opt for a buy-to-let equity release and use it for more investments, to improve a property, or to add funds to their retirement pot. 

What are the different types of equity release?

While the different types of equity releases for buy-to-let properties are limited, there are a few others worth exploring if you are interested in freeing up some of your property capital. 

Here are some of the most common ones:

  • Lifetime mortgage: A lifetime mortgage allows homeowners above the age of 55 to borrow money against the value of their own home.

  • Impaired life: Some providers offer homeowners impaired life equity release that allows people to release more capital if they are ill or disabled.

  • Income: Income equity releases offer homeowners the opportunity to release equity in the form of a regular income or in staged payments over many years. 

  • Inheritance protection: Inheritance protection equity releases allow borrowers to set aside and receive a percentage of their property value, which is protected by interest roll-up. 

How much equity can I release on my buy-to-let property?

The amount of equity you can release from a buy-to-let property depends on how much it is worth, how old you are, and how much equity is attached to the property. 

To qualify for this type of deal, you’ll generally need to be over 55 and have current tenants in a shorthold lease of no less than 12 months.

The property will also need to be single-occupancy and hold a legitimate lease, so there should be no sublets.

Plus, you’ll need your main residence in the UK to be worth at least £70,000.

How do I release equity on a buy-to-let property?

The simplest way to release equity on a buy-to-let property is to remortgage it.

This ensures that your rental property’s equity is handled predictably and produces the best results for your property’s value and available funds.

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The pros and cons of equity release on buy-to-let

When it comes to accessing equity in your property, there are pros and cons to consider.

An equity release on a buy-to-let property is no different.

Let’s take a quick look at the pros and cons of equity release on a buy-to-let property.

Pros:
  • You don’t need to use your home as collateral for the loan. 

  • You’ll never owe more money than the value of your home.

  • You may be able to reduce your inheritance tax bill. 

Cons
  • If your buy-to-let is worth less than your main home, you may not be able to release equity.

  • You may face additional property tax fees. 

  • You won’t be able to take out a second loan using your property as collateral. 

What are some alternatives to equity release?

As a landlord seeking equity release, you have fewer alternatives than a traditional homeowner.

However, there are a few alternatives to equity release that may work.

This includes:

1. Remortgaging 

If you can prove that as a landlord, you earn a regular income from rental costs paid by tenants, you can demonstrate your financial stability and potentially qualify for a funds release by your provider. The higher your credit score, the better. 

2. Selling the property

It is always a good idea to follow real estate market trends and get your property routinely valued to find out if its worth has increased over time. 

If it has, you are in a good position to sell your property, liquidate the asset, and gain access to its equity.

However, selling property can be a long, drawn-out process without the right strategy, so if you do this, make sure you talk to a professional financial adviser. 

3. Second charge 

Another alternative to equity release is a second charge, which is when you take out a second loan on your property.

This is one that is completely separate from the main mortgage and can be legally secured against however much equity is in question. 

4. Further advance 

A further advance is an increase on your present arrangement that is drawn up by a provider who gives you cash in exchange for increased mortgage rates.

If you choose this alternative, the amount of money you borrow will still need to be repaid at the initially agreed-upon rate. 

Want to learn more about equity release on buy-to-let?

Remortgaging your home using equity release on a buy-to-let property is an effective way for landlords to access their tied-up wealth and fund important ventures.

When it comes to managing your personal finances, seeking the advice of a professional is worthwhile.

Get matched with a mortgage broker at Unbiased to get expert advice about equity release on your buy-to-let property.

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About the author
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.