How does equity release work? A guide for buy-to-let landlords

Whether you’re looking for extra cash to fund your retirement or need to make urgent repairs to your property, equity release can be an alternative to remortgaging.

Read on to understand what equity release for landlords is, who can use it, and the risks involved.

• Best buy-to-let areas in 2024
• Who is responsible for decorating rented property?
• Sharp rise in landlords using limited companies to buy rental properties
• What does accidental damage insurance cover?

What is equity release?

Equity release is a way to access money after you’ve built up capital on your investment property.

For buy-to-let landlords the way to do this is through a lifetime mortgage – but you have to be over 55 years old.

A lifetime mortgage allows you to borrow a proportion of your property’s value, and you’ll pay interest on that loan.

You could want to access cash this way for a number of reasons. Maybe you’re thinking about retirement? Or perhaps you need a short-term injection of cash to fund essential repairs and maintenance?

Depending on your financial situation, you should consider whether selling up would be a better option to access funds, as the amount of debt you owe can increase rapidly over time.

Another way to release equity is through remortgaging. Read our guide to find out how to remortgage a buy-to-let.

It’s important to discuss your options with a broker or financial advisor so you fully understand what’s available to you.

How does equity release work for buy-to-let landlords?

When it comes to equity release on rented property, your options are limited. There are a number of providers that offer an equivalent of a lifetime mortgage for landlords, but some will only offer plans for residential homeowners.

If you have a portfolio of properties you may be able to release your combined equity across all of them.

As we’ve already mentioned, you’ll need to be over the age of 55 to qualify for a lifetime mortgage. And if you’re releasing equity this way, you won’t usually have monthly repayments. Instead, the loan (plus interest) will be repaid when you die or sell your property to go into care.

Pros and cons of equity release

Equity release through a lifetime mortgage could be a good option for you, but it’s important to consider the pros and cons.

Pros

• loans are regulated by the Financial Conduct Authority (FCA)
• access tax-free cash tied up in your property
• there are no restrictions on how you spend the money you release
• plans regulated by the industry body, Equity Release Council, offer a ‘no negative equity guarantee’ so you’ll never owe more than the value of your home

Cons

• interest rates can be very high (although should be capped if your plan follows Equity Release Council guidelines)
• the amount of interest you owe can build up rapidly over time
• you may have to pay extra charges if you decide to pay your loan off early
• you may not be able to leave your home as inheritance as there’ll be debts to repay first
• if a plan doesn’t meet Equity Release Council Standards then you could be taking unnecessary risks

How much equity can I release?

Usually with lifetime mortgages, you can release between 20 and 60 per cent of the market value of the property. You can choose to release it as a lump sum, or in instalments.

The Times Money Mentor has an equity release calculator you can use to work out how much equity you might be able to release from your property.

Equity release costs

Costs for equity release can vary. Aside from interest rates, you’ll also need to pay fees for:

• the lender’s application/set-up costs
• a financial advisor
• a surveyor (to inspect the property so the lender can secure a valuation)
• a solicitor

This article is intended as a guide only. You should speak to a financial advisor or a mortgage broker for equity release advice, or if you’re unsure about anything.

Do you have any unanswered questions about equity release schemes? Let us know in the comments.