Releasing equity to buy a second home

Many people approaching or enjoying retirement want to make the most of this stage of life. For some, that might mean having a second home, whether that’s a coastal cottage for summer breaks or a city apartment closer to family and leisure activities like the theatre.

Research from the government’s English Housing Survey shows that second home ownership is relatively common among older homeowners, with 31% of 55–64-year-olds owning a second property, and 27% of owners aged 65 and over. For many, these properties are used as holiday homes, while others use them as a long-term investment.

But how do homeowners raise a deposit and associated costs for a second home? In this article, we’ll explore whether equity release could help.

What to think about when considering equity release for a second home

If you’re thinking about using equity release, your independent financial adviser will talk this option through with you to help you decide if using it for a second home is the right choice for you.

Main residence rule:

Most lenders will expect the home you release equity from to remain your main residence. Meaning you’ll need to live in it for the majority of the year. For example, a Pure lifetime mortgage needs you to occupy the residence for at least 9 months of the year.  

Credit and affordability:

Equity release plans are largely based on your age and the value of your property rather than your income, which may make them an option worth exploring for later life borrowers. Please note, the loan isn’t usually repaid until you die or go into long-term care.

Other options your adviser may talk through with you

Your financial adviser will go through all available options with you. They may determine that you can borrow more against your current home by remortgaging or that you can take out a standard residential mortgage for the second property.

Frequently asked questions on second properties and equity release

These frequently asked questions are based the equity release plan being a lifetime mortgage.  

1. Can I buy another property with equity release? 

In some cases, you may be able to use a lifetime mortgage against your main residence to release funds which can be used to buy a second home. A lifetime mortgage is a long-term loan secured against your property, where you continue to own your home while borrowing money secured against it. Learn more about lifetime mortgages on our ‘what is equity release’ and ‘how does equity release work’ pages.

2. What’s compound interest and how does it work? 

With a lifetime mortgage, interest is added over time (this is known as compound interest). This can reduce the value of your estate and may impact the inheritance you leave.

You can find out more about the difference between compound interest and simple interest on our compound interest explained page. Your financial adviser will also be able to walk you through this.

3. What happens to my second home when I die or move into long-term care?

A lifetime mortgage is usually repaid when you pass away or move into long-term care.

Because the mortgage is secured against your main residence, any other property you own isn’t directly affected. When the time comes, your main home is typically sold to repay the loan.

Your second property isn’t linked to the lifetime mortgage. It would usually form part of your estate, along with any other assets you own.

If you move into long-term care, your second property may be taken into account when your care needs are assessed. However, this is separate from your lifetime mortgage, which remains secured only against your main home.

4. What costs are involved when buying a second home?

The usual costs of buying a new home like solicitor fees and potentially stamp duty will apply. Your financial adviser can help you factor these costs into your borrowing plan to make sure you’re covered. While not a definitive list, here are some cost points to consider and review with your adviser:

Pre-completion costs:

• Deposit

• Stamp duty (Likely to attract a higher Stamp Duty Land Tax)

• Legal and conveyancing fees

• Survey and valuation costs

• Mortgage arrangement fees

   

   

Post-completion costs:

• Mortgage payments (if there is one for the second home)

• Council tax

• Buildings and contents insurance

• All utilities

• Ongoing maintenance and repairs

• Any ground rents or service charges

• Travel costs to get to the second property

• Any tax considerations should you choose to sell at a later date

A standard lifetime mortgage doesn’t require any repayments unlike a residential mortgage, but you may decide to make voluntary repayments on a regular or ad-hoc basis. This can help you manage the interest that rolls up over time.

It’s important to factor in overall maintenance costs too.  You'll be responsible for maintaining two properties, which can be time-consuming and costly, especially if the second home isn’t around the corner.

5. Can I buy a second property for a family member? 

Yes, but it will depend on the lifetime mortgage’s terms, purpose of the funds, and how you decide to manage the second property with your family member.

Gifting for a deposit

You could gift the funds released through the loan to your family member and enable them to put a deposit down to buy a property in their own name. In this case, your adviser will encourage you to confirm the following with your family:

• Is the family member paying you back?

If so, what’s the rough timeline for this. If you want the money back in the next 5 years, but they’re looking at a 10-year plan, it’s best to have agreed on this before the lifetime mortgage is considered.

• Is the family member paying the interest on the loan?

As previously mentioned, interest rolls up on a lifetime mortgage, which is different compared to interest on a residential mortgage. If you do want your family member to repay the compound interest, then it’ll be good for this to be clear from the start.

You buy and own the second property 

If the property needs to be purchased in your name for the family member to live in, then you’ll want to clarify questions like ‘how much rent to ask for?’, ‘is this your only rental property?’, ‘is this a business decision, rather than private lending?’ with your financial adviser.

You’ll need to confirm what needs to be in place to lease out your second property to family. For example, will the family member be repaying the loan and interest on it. As a lifetime mortgage uses compound interest, it’s important for both parties to be clear on this works before moving on to application.

Conversations around rent, upkeep responsibilities, and the long-term plan for the property are also good to have early on, so everyone is on the same page.   

6. Can I have two mortgages? 

Yes, it may be possible to have two mortgages, but it depends on how they are arranged.

Some people have a mortgage on their main home and a separate mortgage on a second property. For example, a homeowner may take out a lifetime mortgage on their main residence and use some of the released funds as a deposit towards purchasing a second property that has its own mortgage.

However, having two mortgages secured against the same property can be more complicated. Most lifetime mortgage lenders require their loan to be the primary (first) charge against your main residence. This means that any existing residential mortgage on that property would usually need to be repaid as part of the lifetime mortgage application. In many cases, customers use some of the funds released from their lifetime mortgage to clear their existing mortgage balance.

As every lender has different requirements, it's important to speak to a qualified financial adviser who can explain the options available based on your circumstances.

7. Can my second home be abroad? 

In some cases, yes. There’s typically no restriction on where your second property is located. What matters is how much you would need to release to help you reach your goal, which you can discuss with your financial adviser. This will all depend on the terms and conditions of the lifetime mortgage you’re considering.

Due to the exchange rates, local laws, regulations, and any additional costs connected to purchasing a property abroad, you’ll need to have the full picture on costs before reviewing with your adviser if it’s a viable option.

You’ll also need to consider overall maintenance and how often you’ll need to be on hand at the property itself for general upkeep. Depending on the location travel costs may be a significant factor.

The main residence rule is still in place, even if your property is abroad, meaning you’ll need to live in your main residence for the majority of the year. In some cases, this can be 9 months of the year. You can review main residence rules of different lifetime mortgages with your financial adviser.

8. Can I use equity release to buy a buy-to-let property as my second property?

Potentially, yes, but it will depend on your individual circumstances and the lender's criteria.

Some homeowners use funds released from a lifetime mortgage to help purchase a buy-to-let property. However, a lifetime mortgage must remain secured against your main residence and not against the buy-to-let property itself.

It's important to note that purchasing a buy-to-let property is different from buying a second home for personal use. Some lenders may place restrictions on how released funds can be used and may not accept applications where the purpose is considered property investment or the expansion of a rental property portfolio. As a result, an application may not always be approved for this purpose.

In addition, owning a buy-to-let property comes with its own responsibilities, costs and potential tax implications, so it's important to seek professional financial and tax advice before proceeding.

Please see Question 4, "What costs are involved when buying a second home?", for more information on the costs that may be involved before and after completion. 

Find more answers for your later life borrowing journey

If you’re thinking about your options, you may wish to prepare a list of questions to discuss with your financial adviser. You can also explore our list of equity release FAQs that include application and repayment questions.

View our equity release FAQs here>