Using equity release to buy a second home has become an increasingly attractive option, especially given the rise in property values. 

As of June 2023, the average UK house price stands at £288,000, marking a £5,000 increase from the previous year.¹ 

This uptick means that many people, particularly those in their 50s and 60s, have significant equity in their current homes that they can utilise to acquire another property, either as a holiday home or as an investment.

However, before taking this step, there are several factors to consider, such as interest rates, eligibility criteria, and the impact on your financial future.

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What Types of Equity Release Schemes Can I Use to Buy a Second Home?

Schemes you can use to buy a second home are a lifetime mortgage or a home reversion plan.

A lifetime mortgage is a more popular choice among borrowers, allowing them to retain home ownership without compulsory monthly payments.

The minimum requirement for this type of scheme is that you - and your partner in joint plans - must be 55 or older and own a property worth £70,000 in the UK.

On the other hand, with a home reversion plan, you sell a share or the whole of your home to a lender with the proviso that you can continue living there until you die or go into long-term care.

Your property will then be sold and the provider will be paid their share and the rest is disbursed to your beneficiaries.

Why Buy a Second Home in Later-Life?

You might want to buy a second home in later-life for one of the following reasons:

• Income Generation: Renting out the property can provide a steady stream of rental income, supplementing retirement funds.
• Diversification: Owning a second property diversifies your investment portfolio, reducing risk associated with having all assets in one place.
• Holiday Retreat: An additional home can serve as a personal holiday retreat, offering a place to relax and enjoy leisure time.
• Inheritance Planning: Passing down a second property can be a valuable inheritance for your children or beneficiaries.
• Location Preference: Buying in a location you love allows you to spend more time in an area you enjoy during retirement.
• Future Downsizing: You can use the house as a downsizing option in the future, selling your primary residence for a smaller home and utilising the proceeds.
• Rental Income in Retirement: Renting out the home can provide stable income during retirement, especially if you no longer have a mortgage on your primary residence.
• Property for Your Children: Purchasing a house can be a way to provide your children with a place to live, either now or in the future, helping them get on the property ladder.

Remember to always get professional help from a financial advisor or broker before making any major financial decisions.

What Are the Pros of Equity Release to Buy a Second Home?

The pros include gaining access to additional funds, not having to make monthly repayments, retaining ownership of your primary residence, and the potential for the second property to appreciate in value.

Let us take a deeper dive.

Access to Additional Funds

Releasing equity allows you to tap into the value of your existing property, providing the capital needed to buy a second home.

This approach can be particularly useful if you have significant equity in your existing property but may not have the cash flow otherwise required for such an investment.

No Monthly Repayments

Unlike traditional mortgages, many equity release schemes do not require monthly repayments - unless it is voluntary.

This feature can make it easier to manage your finances without the strain on your pocket, especially if you are on a fixed income or retired. 

Retain Ownership of Your Home

You continue to own your primary residence, while also enjoying the benefits of a second property, whether for leisure or as an investment. 

Potential for Property Appreciation

Using your primary residence to buy a second home offers the potential for property appreciation. 

If the value of the second property increases over time, this could enhance your overall financial standing. 

The profit from selling the second home in the future could potentially offset the costs and interest accrued through the equity release scheme.

What Are the Cons of Equity Release to Buy a Second Home?

The cons include reduced inheritance for your heirs, the potential impact on means-tested benefits, high borrowing costs, and accumulating interest rates.

Reduced Inheritance

The equity released will ultimately be repaid by the sale of your property, typically when you die or go into long-term care, which could reduce the amount you leave to your heirs.

Means-Tested Benefits Affected

Unlocking equity might change your financial standing and could impact your entitlement to means-tested benefits like Pension Credit, Universal Credit, and Council Tax reduction.²

Even though releasing property value is categorised as a loan and usually exempt from benefit calculations, it could still affect your eligibility for these benefits depending on how you use the released funds.

High-Cost Form of Borrowing

The option can come with a high cost of borrowing that includes various charges, including advice and application fees. 

Additionally

You will incur legal costs for both the equity release and the property purchase. 

If you are considering buying a property overseas, there may be extra expenses, such as foreign transaction fees. 

Over the long term, owning a second home means double the council taxes, insurance, and maintenance costs, adding to the overall financial burden.

High Interest Rates

High equity release interest rates are a significant factor to consider. 

The rates compound over time, which can substantially increase the total amount you owe, making it a more expensive option in the long run, especially if you are not making voluntary repayments.

How to Choose an Equity Release Provider to Buy a Second Home

When sifting through providers to buy an additional home, you will need to thoroughly research provider companies and the features they have to offer.

Researching Providers

When researching providers, it is crucial to compare different options on the market and only consider members of the Equity Release Council. 

Look for customer reviews and ratings to gauge the reputation of the provider.

Also, look closely at the variances in interest rates between providers and any other ‘perks’ they may offer, such as covering the valuation fees.

Always ensure the plan aligns well with your specific needs, such as your financial goals and the type of second property you want to buy.

An equity release advisor can point you in the right direction.

Key Features to Consider With Equity Release Plan for a Second Home

When looking for a plan, focus on key features like flexible terms that match your long-term goals. 

Low interest rates can be crucial to minimise the long-term financial impact, especially since equity unlocked often involves compounding interest. 

Also, consider plans that do not impose penalties for early repayment, giving you the freedom to pay back the loan early if your circumstances change. 

Make sure these features align with your financial situation and goals for the second property.

What Are the Tax Implications of Buying a Second Home with Equity Release?

When considering purchasing an additional property, it is crucial to understand the various tax ramifications, including Stamp Duty and Capital Gains Tax.

Stamp Duty on Second Homes

In the UK, purchasing a second home means you will pay an additional 3% in Stamp Duty Land Tax compared to buying a primary residence.³

Capital Gains Tax on Your Second Home

When it comes time to sell your second property, you may be liable for Capital Gains Tax on any profit after considering allowable expenses and reliefs.⁴

What Are the Alternatives to Using Equity Release to Buy a Second Home?

It is essential to explore the available alternatives like remortgaging or downsizing.

Here is more details:

• Remortgaging: Use your primary home as collateral for a new mortgage.
• Traditional loan: Requires affordability checks and a fixed repayment schedule.
• Downsizing: Move to a cheaper primary residence to free up funds for a second home.

Common Questions

Conclusion

Releasing property equity can offer a viable way to unlock the value tied up in your primary residence, enabling you to purchase a second home. 

However, it is crucial to weigh the pros and cons, such as the potential for property appreciation against high borrowing costs and impact on means-tested benefits. 

Always consult a financial advisor and thoroughly research providers to ensure the plan fits your specific needs. 

In conclusion, doing your due diligence is essential when considering equity release to buy a second home.