Equity release schemes are a well-known option for homeowners aged 55 and above to access a portion of the value tied up in their property, providing a means to enhance their retirement income. However, is equity release applicable to buy-to-let properties?
This guide will explore whether this is feasible and outline other potential alternatives worth considering.
Can you use equity release on a buy-to-let property?
Until recently, equity release schemes were available for buy-to-let properties, including larger portfolios. However, this is no longer an option due to increased uncertainty in the property market.
Currently, equity release providers restrict these schemes to your primary residence, with rare exceptions for second homes used exclusively for personal purposes.
One of the reasons rental properties have not been widely accepted for equity release is the challenges that arise when the loan agreement concludes, requiring the property to be sold while tenants remain in place.
This scenario necessitated careful consideration of tenancy agreements to ensure they were adaptable and equitable for all involved parties.
Can you remortgage to release equity from a buy-to-let?
Yes, you can access the funds tied up in your buy-to-let (BTL) property, and in most cases, remortgaging is the simplest method to achieve this.
When remortgaging, the amount of equity you can release will depend on the lender’s loan-to-value (LTV) limits and their specific lending criteria for BTL properties. These criteria are usually based on the projected rental income, which must typically exceed the total mortgage repayments by a margin of 125% to 145%.
How much equity can you release?
The table below illustrates how much equity you could release when you remortgage your BTL property. The maximum LTVs for BTL mortgages are usually lower than for residential mortgages to cover the additional risk to the lender.
|
BTL Property Value |
Outstanding mortgage |
Current LTV |
Lender’s maximum LTV |
Amount of equity available to release |
|
£200,000 |
£50,000 |
25% |
60% |
£70,000 |
|
£250,000 |
£100,000 |
40% |
70% |
£75,000 |
|
£300,000 |
£160,000 |
53% |
75% |
£65,000 |
|
£400,000 |
£200,000 |
50% |
80% |
£120,000 |
Mortgage repayments Vs. rental income required
The following table shows how much forecasted rental income a mortgage lender would expect to see based on a specific mortgage repayment.
|
Monthly mortgage repayment |
Minimum monthly rental income required (125%) |
Maximum monthly rental income required (145%) |
|
£500 |
£625 |
£725 |
|
£600 |
£750 |
£870 |
|
£700 |
£875 |
£1,015 |
|
£800 |
£1,000 |
£1,160 |
|
£900 |
£1,125 |
£1,305 |
|
£1,000 |
£1,250 |
£1,450 |
The information in the above tables is purely for illustration purposes only
How to release equity by remortgaging your buy-to-let property
Here are the steps to follow when remortgaging your buy-to-let property to release equity:
Determine the precise amount of equity you need to release: Additionally, compile supporting documentation that details the property's historical rental income and any projections for future earnings.
Compare available interest rates from various lenders to identify the most competitive option: It doesn't hurt to do some research before you get started properly. Get an idea of what kind of rates and deals are available, and the criteria you will need to meet to get them.
Speak to a broker: Your chances of getting the most suitable deal available will increase if you speak to a broker before you proceed. Their knowledge, experience and lender contacts will open up a range of edditional options for you.
Alternative options
If remortgaging to release equity is not a feasible option, there are several alternative ways to raise funds:
- Equity Release on Your Main Residence. If you are over 55, you could explore releasing equity from your primary home instead of your buy-to-let (BTL) property.
- Second Mortgage. If your current mortgage has not yet reached the end of its term and you wish to avoid early repayment charges, you could take out a second mortgage on the BTL property to access funds quickly for a specific purpose.
- Personal Unsecured Loan. For smaller funding requirements, a personal loan might be more suitable. This approach allows for shorter repayment terms, with lower total interest costs and no need to use property as collateral.
- Secured Loan. A secured loan, using your property as collateral, can often be arranged swiftly. These loans are typically used for specific purposes, such as home improvements or purchasing a vehicle.
- Sell the Property. Selling the BTL property is a straightforward way to access equity. Once the outstanding mortgage is repaid, you retain the remaining funds, although this means forfeiting future rental income.
- Utilise Other Savings or Investments. If you prefer not to increase your debt, consider using available savings or investments. This option avoids additional interest charges and leaves your property unaffected.
Frequently Asked Questions
Yes, it is possible. If there is sufficient equity in your primary residence or a buy-to-let property you own, you can use it for this purpose. However, alternative options may offer lower overall costs. It is advisable to consult with one of our advisers to explore all available options before making a decision.