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Published 21 November 2023

How to Release Equity to Buy A Second Home

You can borrow against your current property to buy a new one through remortgaging or by taking out equity release.

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Releasing equity to buy another property can be a viable way for some people to fulfil their second home dreams. In the 10 years to September 2023, the average UK property price had risen by 65%, from £176,098 to £291,385, according to government data. That means for many homeowners – particularly those that have been on the property ladder for some time – their home is their biggest asset and a rich source of cash.

To unlock the equity that has built up in your home, you don’t necessarily need to sell up and downsize. Homeowners with a reasonable amount of equity in their homes can borrow against their property to access some of this money and, should they so wish, potentially buy another one.

If you still have a mortgage, you may be able to remortgage to release equity and request a sum larger than the amount required to pay off your current loan. The alternative for older homeowners (over 55) who have repaid their mortgage is to use an equity release plan to dip into this pot. However, borrowing to invest or make a sizeable purchase doesn’t always make sense. Read on to find out what you need to know.

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Releasing equity to buy a second home

When you release equity from your home you can spend it as you wish. Popular reasons are to fund home improvements or repay debts, but there’s nothing to stop property-obsessed Brits from releasing equity to buy a second home, for holidays or weekends away or an investment property to rent.

Remortgaging to buy another property

Whether you relish the luxury of a bolt-hole by the beach or fancy investing in buy to let, you can borrow against your current property to buy a new one. However, unless you can raise sufficient cash to buy the new property outright, it is likely you will need another mortgage.

For both buy-to-let and holiday home purchases you may be able to get an interest-only mortgage, which has lower monthly repayments than a traditional repayment mortgage. However, as you are only repaying interest you would need a plan to repay the capital at the end of the mortgage, which, unless you have something else up your sleeve, often means selling the property.

Mortgages on second properties are regarded as higher risk by lenders, and for this reason you are likely to need a deposit in the region of 20%. Older homeowners may also find it harder to remortgage if the term is likely to run into retirement.

You will need to have a good credit record too. If your credit score has dropped since you last took out a mortgage, you may struggle to get a good deal. Similarly, lenders will need to be confident you can afford the repayments on both mortgages.

The complexity involved in borrowing against one property to buy another means it is sensible to consult a mortgage broker. Armed with information about your plans and a rundown of your finances, they will be able to recommend the right mortgage with a lender that is likely to accept your application.

» MORE: See current mortgage rates

Using equity release to buy a second home

A holiday home could provide a real boost to your retirement and there’s no reason you can’t theoretically use the money you raise with an equity release plan to fund the purchase of a property either here in the UK or overseas. Similarly, you could buy a property to rent out.

However, both could be potentially high risk and costly investments and there are plenty of equity release considerations you would need to bear in mind first.

New mortgages are difficult to secure for older borrowers, which means it’s likely you would need to be able to buy your second property outright.

Then there are additional expenses involved in the purchase. Stamp duty in particular can be a deal-breaker in the UK, with buyers of second homes paying an extra 3% than buyers of primary residences. You may well have to pay tax on rental income too, with changes to fiscal policymaking it more difficult for landlords to make money.

Looking further down the line, it is also important to consider the expense of equity release and the impact it could have on the value of your estate when you die. Even with a no negative equity guarantee, you could potentially be left with little or no money left in your home to pass onto your family.

To get an equity release plan you need to consult a specialist equity release adviser who can help you work out whether it is the right approach for you and, if so, recommend the most appropriate product. You will also be required to seek legal advice.

» MORE: Lifetime mortgages explained

Image source: Getty Images

About the Authors

Rachel Lacey

Rachel Lacey is a freelance journalist with 20 years experience. She specialises in personal finance and retirement planning and is passionate about simplifying money matters for all.

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Tim Leonard

Tim is a writer and spokesperson at NerdWallet and holds the Chartered Insurance Institute (CII) Level 3 Certificate in Mortgage Advice. He has over 20 years’ experience writing about almost…

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