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How to release equity to invest in buy-to-let property

If you’re looking to invest in rental property, remortgaging to release equity could be a viable path to raise enough cash for a deposit or possibly to buy an investment property outright. While remortgaging can be a great way to release equity, there are many factors to consider before deciding if this is the right choice for you.

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How can you remortgage your home to invest in property?

If you’re looking to purchase a buy-to-let property, you'll typically need at least a 25% deposit. As this can be difficult to pull together, many people look at remortgaging an existing property to aid them. 

Whether you remortgage your own home, or another investment property, the equity held can be used as the deposit for your new purchase. 

Equity is the difference between the value of the property and how much you owe on the mortgage. For example, if you have £100,000 left to repay on your mortgage, and your property is worth £250,000, your equity is £150,000.

When you remortgage, you switch your current mortgage to a new deal – which could be with a new provider or the same one you’re currently with. 

The new mortgage is used to repay your existing mortgage, and you can release the equity, essentially re-borrowing the money that you have already repaid - as well as any natural gain from a rise in property prices.

So, how do you get the best buy-to-let mortgage rates? If you have a very large level of equity it may be possible to buy an entire investment property outright. But in most cases, you can use the equity as a deposit for a new buy-to-let mortgage deal. The larger the deposit, the better the rates that are generally available to you.

How much can you borrow?

Aside from your personal financial circumstances, the amount you can borrow when you remortgage to release equity depends almost entirely on how much equity you have in the property. 

Each lender has a maximum LTV (loan to value) they are willing to lend. As releasing equity will increase the LTV of your borrowing, you'll likely be limited to around 75% of the property value. That said, there are some lenders that will lend a slightly higher LTV for this purpose. 

It’s also important to note that not all lenders allow you to remortgage your personal home if you’re releasing equity for business purposes, i.e a buy-to-let purchase. For example, NatWest don't allow equity release from a residential home for commercial purposes, whereas Halifax do*. 

*At the time of writing, please note that individual lender criteria can change at any time

How to access your equity

If you're looking to invest in buy-to-let property, there are a number of routes you could take to use existing equity, including:

Selling your home

It can be simpler to sell your property and downsize to a cheaper home than remortgaging to release equity. Any profits from the sale of your original home, once you've purchase the downsized property can then be used as a deposit on a buy-to-let investment.

Remortgaging to release equity from your home

It’s unusual that you could purchase a new property outright by remortgaging to release equity from your own home, but possible if it's very high value and you hold a large percentage of equity.

In most cases, however, the equity held can be used as a deposit for a new buy-to-let property mortgage. When you remortgage, you increase the loan size to cover both repaying your existing loan and borrow enough for the buy-to-let deposit. 

It's a good idea to have the rental income on your new investment cover the cost of your larger residential mortgage, as well as the repayments on your buy-to-let mortgage.

Remortgaging to release equity from a buy-to-let property 

It’s fairly common for portfolio landlords to remortgage existing investment properties to purchase additional buy-to-let property, expanding their portfolio. Of course, this is also less risky, as you’re not using your own home as collateral. 

The common issue here is that buy-to-let properties are generally lower value than personal residential properties, which means that you may have less equity to release. 

Some investors find that a portfolio mortgage, which consolidates all your buy-to-let properties onto one mortgage, helps them to manage their finances. When you take out a portfolio mortgage deal, it’s possible to release equity at the same time.

Should you remortgage to invest in buy-to-let property?

Whether this is the right option for you will depend on your individual circumstances. While remortgaging to release equity can make it possible to finance a buy-to-let mortgage, there are benefits and drawbacks to every form of borrowing. 

For example:

  • You may need to pay ERCs (early repayment charges) on your existing mortgage to leave the deal if you're within a fixed period of any type. These fees apply to most mortgages, unless you’re on your lender's SVR (standard variable rate)

  • You may not have enough equity in your existing property to finance the buy-to-let property

  • Unless you're using the equity released from remortgaging to buy an investment property outright, you'll have two mortgages to repay

  • If you borrow more against your existing equity, you could be faced with higher interest rates on your original mortgage - as the more equity you leave in your home, the cheaper the mortgage rates available to you