Expanding your property portfolio or purchasing a second home represents a significant financial milestone. Whether you intend to purchase a buy to let investment, a holiday home, or a residence for a family member, releasing capital from an existing asset can provide a viable route to securing the necessary funds.

When homeowners use the value tied up in their existing home to fund further purchases, the process typically involves a cash-out remortgage, where you replace your current mortgage with a larger loan. The difference between your existing mortgage balance and the new, larger loan is paid to you in cash, which you then use as a deposit for another property.

As with any mortgage application and property purchase, there are significant legal and financial considerations that could affect the viability and determine whether this approach is the best option in your circumstances.

At JMW, we provide the legal structure necessary to facilitate these transactions. In our guide to remortgaging to buy a second property, our remortgage solicitors outline the circumstances where a remortgage is a suitable option and the factors you should take into consideration.

How Does Equity Release Work?

The process of remortgaging a property to buy another is a standard way to release capital. By taking out a new mortgage larger than your existing one, you turn the excess (your equity in your home) into liquid cash. You can then use this cash to buy a property outright or as a deposit for a second mortgage.

You may choose to stay with your existing lender or move to a new one. A new lender might offer better interest rates or more flexible terms, such as the ability to make overpayments without a heavy early repayment charge. Moving to a new lender is a standard remortgage, whereas staying with your current lender and increasing the loan is often called a further advance. Both routes allow you to use the wealth currently tied up in your bricks and mortar.

Should I Switch From My Current Mortgage to Release Equity?

Remortgaging to buy another property can be a better option than a personal loan, especially if your credit rating allows you to access some of the better deals that are available. Rising property values often provide the equity needed for a substantial down payment on a new property without the need for years of personal saving. At the same time, you need to consider the associated costs, including legal fees, valuation costs, and potential early repayment charges from your existing lender, alongside your ability to keep up with mortgage repayments on two properties at once

If you are purchasing a buy-to-let property and the rental income you expect to make exceeds the higher monthly repayments and maintenance costs, the investment in a second property often proves lucrative. However, lenders will assess your ability to manage two mortgages or a larger single debt secured against your primary residence and, because a mortgage is a secured loan, your home or your rental property may be at risk of repossession. You also need to be certain that you can release enough equity to fund the purchase of an investment property, and that any costs will not outweigh the savings that a new mortgage deal can deliver.

Further, while there is no fixed figure, having at least 25 per cent to 30 per cent equity in your current property is usually the minimum requirement when remortgaging to buy another property. This leaves a sufficient "buffer" in your primary property (typically 25 per cent) while releasing enough cash for a deposit on another, whereas attempting to purchase another property with a lower equity stake may result in lenders viewing the application as higher risk and lead to higher interest rates. Buyers with a poor credit history may also struggle to purchase a buy-to-let property or add to an investment portfolio as the deals offered by lenders may be cost-prohibitive.

Why Do Buyers Release Equity?

While releasing equity is a powerful tool, it increases your financial commitment, with the debt secured against your primary property increasing. If your employment status changes or interest rates rise, you may struggle to meet the higher monthly repayments unless you have prepared for this eventuality. As such, it is important to consider your potential return on investment when buying a second property, to determine whether the decision will remain viable in the long term.

The following scenarios are common situations where buyers choose to release equity, but whether this will be suitable for your needs depends on several other factors and it is worthwhile to consult a mortgage adviser before making any decisions.

Buy-to-let

Purchasing a buy-to-let property is often a strong reason to remortgage, as rental income will cover repayments of the new mortgage. Lenders view these as business ventures and focus on the potential rental income when evaluating what you can afford and how much equity to release. Usually, the rental income must be at least 125 per cent to 145 per cent of the monthly mortgage payments.

With that said, interest rates for a buy to let mortgage are generally higher than those for residential mortgages. Further, you will remain responsible for your mortgage payments even if your property is empty for a period and you have no rental income. As such, you should keep a reserve fund to cover maintenance payments and periods without tenants.

International property and holiday homes

Releasing equity from your home to fund the purchase of a family holiday home is a popular choice, and it may also generate seasonal income. This is a more straightforward way to buy property abroad than securing a mortgage from a foreign lender and working with an offshore legal team, although you may still need legal advice if you intend to let the property.

Commercial property investments

For those looking to diversify, purchasing commercial property - such as office spaces, retail units, or warehouses - through equity release is an option. While you can fund this via a residential remortgage, you will need a commercial mortgage for the new asset. Commercial property transactions are bespoke and often require the input of specialist lenders, so it is important to work with an experienced solicitor during this process.

How Much Equity Can I Release?

The amount you can borrow depends on how much equity you have built up. Equity is the difference between the current market value of your home and your outstanding mortgage balance. Lenders also use what is called the loan-to-value ratio, which compares the amount of money you wish to borrow to the full value of the property.

The equity you release must cover the deposit for the new property, which is typically 20 per cent to 25 per cent for a buy to let mortgage or a second residential mortgage. Most lenders allow you to borrow up to 75 per cent or 80 per cent of the value of your property when releasing equity, though some specialist lenders offer different thresholds based on income.

If the purchase price of the second property is high, you will need more equity in your existing home to bridge the gap. If you have significant equity, you may even be able to purchase a second property outright using a single, larger mortgage on your primary property. With that said, the offers you will receive depend not only on your current mortgage balance, but on your credit status and the lender's criteria.

You should also account for the financial obligations involved, beyond the mortgage payments you will owe, as certain fees and costs will be taken from the lump sum you borrow. Buying a second property triggers additional expenses including:

• Stamp Duty Land Tax: When buying a second property in England or Wales, you usually pay a 3 per cent surcharge on top of standard rates.
• Legal fees: You will require a solicitor to handle the remortgage of your existing property and the purchase of the new one. JMW provides transparent fee structures for these services and offers fixed fees for some services.
• Valuation fees: Lenders require professional valuations of both properties to ensure they provide sufficient security.
• Mortgage application fees: Many competitive offers come with arrangement fees, which can often be added to the mortgage balance.

Work with a mortgage broker and a solicitor who has experience in residential property transactions to get a sense of the potential costs and learn how much equity you could draw on. A mortgage broker can often identify the lenders offering the most competitive terms for your specific circumstances and access bespoke deals that will meet your equity needs.

Should I Consider Alternative Financing Options or Structures for a Second Property?

There are several structures you can use when funding a new acquisition, and the right choice will depend on your financial stability and the intended use of the new property. Options that you may consider include:

Taking out a second mortgage

In this scenario, you keep your first mortgage as it is and take out a separate loan secured against your home, often referred to as a second charge mortgage. This is useful if your current mortgage has a very low interest rate that you wish to retain, or if early repayment charges are high.

Let-to-buy arrangements

If you want to move into a new home but keep your current property as an investment, a let-to-buy arrangement is ideal. You move your current house onto a buy to let mortgage, release equity for a deposit on a new residential mortgage, and then rent out the old property.

Using a bridging loan

Bridging loans are short-term options used to bridge the gap if you need to buy another property before the remortgage on your current home is finalised. These are frequently used for property auctions. While effective, bridging loans require a clear exit strategy to pay off the debt via the long-term remortgage process.