Equity release is simply a way to realise some of the value in your existing home by increasing and/or extending the existing loan on your existing home and using that loan capital raised for other purposes. This can be used for a variety of reasons and the purchase of a second home is one.
If you increase the loan on your primary home, the mortgage lender will want you to be able to prove that you can afford the larger loan. Your personal circumstances will dictate whether you stay with your existing lender or decide to remortgage the property with another. Remember that this may involve additional costs including valuation and arrangement fees, early redemption fees and legal fees.
The more money you release by way of a remortgage, the more likely that the costs of borrowing will increase. Certainly, over say 60% LTV (Loan to Value) you can expect the new loan to be priced higher to reflect the risk the lender is perceived to be taking.
The next thing to consider, is what sort of property are you buying? If it’s a holiday home the affordability question will be asked again and unless you are buying it entirely from cash, any lender is going to need to see that your personal circumstances are such that you can afford both loans. In most cases, lenders will expect a LTV on your primary residence of 80% or less.
If the property is for investment purposes and you expect to buy to let, then the mortgage lender on the second home will want to know that the rent will cover the mortgage payments in the right ratio. You will also need to declare to the lender that this is a buy to let investment and the terms for lending are likely to be less favourable.
It’s also worth remembering that when buying a second property you will be accruing additional costs such as legal fees, loan arrangement fees and enhanced stamp duty charges. Allow for these costs when making your decisions about how much equity you need to release from your primary home.
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