There are many reasons people choose to unlock some of their property wealth in their 50s and 60s, including to free up cash to buy another property to use as a holiday home or provide additional income.
Equity release, as the name suggests, enables you to release some of the equity tied up in your property without having to sell your home, and you can use the money however you wish.
It definitely won’t be right for everyone, however, and if you are considering another property purchase, you may decide to remortgage your current home instead to raise funds, or to take out a buy to let mortgage if you’re able to and you’re planning to use the property to provide you with a rental income.
You can find out more about the pros and cons of equity release in our article Equity release – what is it and how does it work?
Here, we look at how you can use equity release to buy a property, and whether this might be the right option for you.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Using equity release to buy another property
Property prices have continued to rise in recent years, which means many people in their 50s and 60s have a substantial amount of wealth tied up in their property. Using equity release, you can release a portion of this money, tax-free, without having to sell up and downsize. You’ll receive this as a tax-free lump sum, or you can take out smaller sums as and when you need them, and you can do what you like with this money, including buying another property. You can usually release up to around 60% of your property’s value so, for example, if your home is worth £500,000, you could potentially release £300,000 and use this money to buy a property outright.
Once you’ve completed your purchase, you won’t need to make monthly repayments like a standard mortgage. Your debt doesn’t need to be repaid until you die or move into long-term care, provided you don’t have a spouse or partner who is still entitled to live in the property. Meanwhile, the interest on the money you owe rolls up, or compounds, until the debt is repaid.
Remember you’ll need to factor in the additional costs of buying a property such as stamp duty and solicitor fees when you’re deciding how much equity to release. There will also be ongoing bills to pay such as council tax, insurance, and utilities which can all add up over time.
If you’re buying a holiday home to let, or use as a bolthole yourself, consider the potential maintenance and upkeep costs too. Alternatively, you may be using the money to buy a property for your child, to give them a leg-up onto the property ladder. You’ll need to think about the tax implications in this case. Read more in our guide Should I buy a property for my student child?
Should you use equity release to buy a property?
Equity release should never be entered into lightly, as there are important downsides to consider. It’s vital to take professional advice before signing up to equity release. Rates are usually higher than standard mortgages, and releasing equity from your home will reduce the value of any inheritance you leave, as well as potentially affecting your entitlement to means-tested benefits. You also may not be able to rely on the value of your property later in life to fund long-term care, if needed. Read more in our article Equity Release – 8 questions to ask yourself if you’re considering equity release and Equity release – what are the risks?
However, while there are downsides you should be aware of, equity release could be a good option if you’re aged 55 or over and you’ve been planning to buy another property in or approaching retirement. After all, at this stage of life, it can be a struggle to get another mortgage, although lenders are now offering much greater choice to borrowers aged 50 and above. Read more about some of the options that may be available to you in our article Mortgages for the over 50s: what you need to know and Mortgages for the over 60s: what you need to know.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Fortunately, lifetime mortgages, which are the most popular type of equity release plan, have become increasingly flexible in recent years. The majority now come with the ability to make overpayments to reduce the amount owed. You may also be able to safeguard a portion of inheritance for your loved ones. Find out more in Lifetime Mortgages explained.
Tony Tobin, equity release specialist at Rest Less Mortgages, said: “Using equity release to buy another property is an option. However, before making such a big financial decision, we look at the customer’s personal situation and whether other options may be more suitable, such as using savings, pension pots, or remortgaging.
“Only once all of the alternative options have been explored would we advise the customer to take an equity release plan, if buying another property was right for them and this was the most suitable way to do it.”
Bear in mind that you can be forced to sell your original home and repay the debt by an equity release provider if you’re no longer living in the property. Therefore, any purchase of an additional property must be for the purposes of renting it out, or using it as a holiday home, rather than using it as your primary residence. If your plan is to buy a property, make sure to discuss this with your equity release advisor, particularly if you plan on downsizing to your second property in the future.
You should also make sure any equity release provider you deal with is a member of the Equity Release Council. Products provided by its members must, for example, provide you with the right to remain in your property for life or until you need to move into long-term care. They also offer a ‘no negative equity guarantee’, so that you can never owe more than the value of your property even if property prices fall.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
How much equity can you release?
Buying any property requires a large amount of money, and if you’re planning on using equity release, you need to work out how much cash you can access. If you have a mortgage on your property, bear in mind that any equity you release must first be used to pay this off.
Make sure you’re aware of all the fees and charges involved in equity release too. Find more information in our guide Costs of equity release explained. Beware that rates have soared in the past year. Average lifetime mortgage rates are currently 6.17%, compared to 4.61% in 2022, according to financial data analyst Defaqto.
Alternative ways to buy another property
As mentioned, there are several ways that you might use to buy another property, and some options include using existing savings or investments, or even drawing money from your pension. You may also consider downsizing to release equity in your current home and buy another property with this money.
You can find more information in our articles Six alternatives to equity release and Five questions to ask yourself if you’re considering downsizing.
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