If you’ve owned your home for a while, you might find that it has increased in value and that you have built up equity over the years.
There are several ways that you can use this equity, including purchasing a second property. In this article, we’ll explore what equity is, how it can be utilised as a method of raising capital and the advantages and things to consider when using it to buy another home.
What is Home Equity?
In simple terms, home equity is the percentage of your home that you own and is calculated by subtracting your outstanding mortgage balance from the value of your property. For example, if your property is worth £450,000 and you owe £150,000, your equity is £300,000. Equity increases as you pay off your mortgage or as your property’s value appreciates over time. Releasing equity, or capital raising,refers to the process of taking equity you have built up on your home and turning it into cash. How you use this cash is up to you, but many homeowners choose to carry out home improvements or expand their property portfolio.
It is important to note at this point that capital raising is different to Equity Release. Capital raising is available to anyone, with sufficient equity within their property, and the sufficient income to support the required mortgage. Equity release is a mortgage designed for over 55s only, allowing them to access equity in their property, without needing to move out of it.
Read on to learn more about how to utilise equity to buy a second property.
How to access equity in your home
Below are the most common ways to release equity from your property:
Remortgaging
If downsizing isn’t an appealing option for you and you wish to remain in your current home, you might consider remortgaging to unlock your property’s value. To do this, you’ll need to get a new loan with a higher amount than your existing mortgage balance, either with your current lender or a new one.
This is a common way to release equity tied up in your home as it can give you access to a substantial sum that can be used as a deposit for a second home or investment property. However, it’s important to remember that remortgage will subject you to a fresh affordability assessment, and so you may face increased monthly mortgage payments and early repayment charges.
Equity Release Schemes
For over 55s, some homeowners opt for an equity release scheme, which allows them to access cash without having to pay it back in monthly instalments. If you’re aged 55 or over, you can opt for a lifetime mortgage, receive a tax-free lump sum or monthly income, and remain living in your property for the rest of your life. The sum will be repaid through the sale
of the property, usually when you die or move into care. A less common option for Equity Release is a home reversion plan, which involves selling all or part of your property to an equity release provider. You will carry on living in your home and the provider will reclaim their portion of the profits when it is sold.
Remember that while releasing equity provides you with a lump sum, it is essentially a loan secured against your home, and like any other must be repaid.
Use our handy equity release calculator to determine how much equity you could release on your home.
Purchasing a Second Property with Leveraged Equity
Now you know how to utilise equity in your home, it’s time to decide what to do with it. Many homeowners use their equity to purchase a second property, be it a holiday home, a buy-to-let property or a residence for a family member. Whatever your reason, there are many things to be aware of before deciding to use equity to purchase another property.
Raising capital through home equity provides immediate access to a lump sum, which can act as a deposit or even cover the full cost of a second property without the need to save for years. What’s more, if you choose to purchase a buy-to-let property, the rental income could help cover your mortgage payments or provide an additional income stream. Owning a second property is also a great way of diversifying your financial portfolio and enjoying long-term capital growth, as both properties could appreciate in value over time.
While using your equity to buy another property is appealing, it’s important to understand the implications.
Make sure to take into account the costs involved in buying a property. Although the sum you receive from equity release is tax-free, your second home might be liable for Stamp Duty, rental income tax and capital gains tax if you sell it in the future. Additionally, your monthly repayments could increase if interest rates rise or the rental income market weakens. You’ll need to ensure that higher monthly repayments are affordable and won’t strain your finances. You should also consider the fact that you could face negative equity if the market falls, which would make it difficult to refinance or sell either property at a profit.
Tailored Recommendations for You
While purchasing a second property with equity can be a smart financial move, it’s also a complex decision. Equipped with expertise in mortgage products and financial planning, our mortgage advisers will provide you with tailored advice and personalised solutions to financing your property purchase.
Get in touch with Cooper Associates Mortgages today for a free consultation to explore your equity leveraging options and ensure you make an informed decision about your financial future.
