If you already own a home or another property, you may be able to release some of its equity by borrowing more against it and use the funds towards a buy-to-let deposit.
That can reduce the deposit you need to find from savings, but it also increases the borrowing secured against an existing property. So before you move ahead, check both sides of the plan: the extra borrowing you want to raise and the mortgage on the rental property you want to buy.
Before using equity for buy-to-let
EQUITY
Check how much may be usable
Property value, your current mortgage balance and the lender’s loan-to-value limits all affect how much extra borrowing may be possible.
BORROWING
Check the cost of raising funds
Borrowing more can increase monthly payments, interest and the amount of debt secured against your existing property.
BUY-TO-LET
Make sure the rental property fits
Having the deposit does not guarantee the new mortgage. The rent, property, loan-to-value and wider application still need to meet lender criteria.
BUFFER
Keep money back after buying
Purchase costs, repairs, insurance and periods without tenants can all put pressure on cash flow, so avoid using every available pound.
How much equity could you release?
Equity is the difference between the current value of a property and the amount still owed on borrowing secured against it.
For example, a property worth £350,000 with a £220,000 mortgage has £130,000 of equity before lender checks.
Example
Amount
Current property value
£350,000
Existing mortgage
£220,000
Equity before lender checks
£130,000
However, equity is not the same as the amount you can borrow. A lender still needs to decide how much extra borrowing it will allow after checking affordability, property value, credit history and the resulting loan-to-value.
If the extra borrowing is approved, you may then be able to use some or all of those funds towards the deposit on the rental property.
Figures are illustrative only. Actual borrowing, available equity, repayments, rates and lender criteria depend on your property, mortgage and circumstances.
Ways to release equity for buy-to-let
There is more than one borrowing route. The right option depends on your current mortgage, any early repayment charges, affordability, how much you want to raise and the mortgage rates available.
REMORTGAGE
Replace your mortgage and raise more
A remortgage replaces your existing mortgage with a new one, usually with another lender. You may be able to increase the borrowing at the same time.
This can make sense if your current deal is ending or another mortgage offers a better overall fit. If you leave a fixed or discounted deal early, check any early repayment charge before deciding.
FURTHER ADVANCE
Borrow more from your current lender
A further advance adds extra borrowing with your current mortgage lender without replacing the whole mortgage.
This may suit you if your existing mortgage deal is worth keeping. Your lender will still assess the extra borrowing, including affordability and the purpose of the funds.
SECOND CHARGE
Add separate secured borrowing
A second charge mortgage is a separate secured loan that sits behind your main mortgage.
It can allow you to keep your existing mortgage in place, but it still increases the debt secured against the property. Compare the rate, fees, repayment structure and total cost carefully.
How lenders assess the extra borrowing
Before a lender lets you raise funds against an existing property, it needs to decide whether the additional borrowing fits its criteria.
Income and commitments
The lender may review your income, regular spending, loans and other commitments to check whether the higher payment is affordable.
Property value and mortgage balance
The current value, amount outstanding and proposed borrowing determine the new loan-to-value on the existing property.
Credit history
Existing debts, payment history and recent credit issues can affect whether the lender accepts the additional borrowing.
Reason for borrowing
The lender may ask why you want the funds and whether using them for a buy-to-let deposit fits its lending policy.
The buy-to-let still needs to qualify
Raising the deposit is only half of the plan. The rental property must still meet the buy-to-let lender’s criteria, so it helps to understand the wider buy-to-let mortgage process as well as the equity you are raising.
Your buy-to-let deposit and LTV still need to fit the new rental property. The lender may assess the expected rent, purchase price, property type and your wider financial position, and it may use a rental stress test to check whether the rent supports the mortgage.
So a larger deposit does not automatically mean a larger mortgage. If the rent is too low or the property falls outside lender criteria, the borrowing may still be restricted.
Does the buy-to-let still work?
Test the borrowing, expected rent and potential yield on the rental property.
Risks to consider before using equity
Using equity can help fund a purchase sooner, but it also connects the new investment decision to borrowing secured against a property you already own.
More secured borrowing
Your existing mortgage or secured debt can increase, raising the amount you need to repay and the risk attached to that property.
Two borrowing commitments
You may need to support both the extra borrowing on the existing property and the mortgage on the new rental property.
Rental income can change
Empty periods, lower rent or repairs can reduce cash flow while mortgage and property costs continue.
Less financial flexibility
Using too much equity for the deposit can leave less cash available for tax, buy-to-let purchase costs, insurance, maintenance and unexpected work.
WORTH KNOWING
More available equity does not automatically make using all of it the stronger option. The borrowing and the rental property both need to remain manageable.
Release equity from another buy-to-let
You may also be able to release equity from an existing buy-to-let property to help fund another rental purchase.
The lender may assess the existing rental property again, including its value, mortgage balance, rent and new loan-to-value. A buy-to-let remortgage can also involve reviewing the wider portfolio if you own several mortgaged rentals.
If you are growing a buy-to-let portfolio, lenders may check both the new purchase and your existing rental properties.
Using home equity can affect monthly payments, loan-to-value and the financial flexibility you retain in the existing property.
How Muttuo Mortgages can help
Using equity for a buy-to-let deposit can involve two lending decisions. We can review the extra borrowing and the rental-property mortgage together before you apply.
Review how much extra borrowing may fit your existing property
Compare remortgage, further advance and other suitable borrowing routes
Check the expected rent, deposit and loan-to-value on the buy-to-let
Talk through both mortgages
Explore the borrowing against your existing property alongside buy-to-let mortgage options for the rental property you want to buy.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate some buy-to-let mortgages.
Your buy-to-let equity questions answered
Can I use equity in my home as a buy-to-let deposit?
It may be possible. You can potentially borrow more against your home or another property and use the funds towards the deposit, subject to affordability, loan-to-value and lender criteria.
Is using property equity the same as equity release?
No. In this article, using equity means raising additional secured borrowing through routes such as a remortgage, further advance or second charge mortgage. Equity release usually refers to later-life borrowing such as a lifetime mortgage.
Is it better to remortgage, take a further advance or use a second charge?
There is no single best route. The right option depends on your current mortgage, early repayment charges, affordability, rates, fees and how much you need to raise.
Will my home be at risk if I borrow more against it?
Borrowing more increases the debt secured against the property. If you do not keep up with the repayments, the property may be at risk, so check affordability and the wider investment costs carefully.
Can I release equity from one buy-to-let to buy another?
It may be possible. The lender can assess the existing rental property’s value, mortgage balance, rent, new loan-to-value and, for some landlords, the wider portfolio position.
Should I use all my available equity for a buy-to-let deposit?
Not necessarily. Using more equity may lower the loan-to-value on the new buy-to-let, but it can leave less financial flexibility for tax, purchase costs, repairs, insurance and periods without tenants.
