For years it has been possible to take an equity release mortgage out against your home in order to free up cash to spend in later life – now you can do it on buy-to-let property.
Specialist lender Retirement Advantage has launched a range of equity release loans specifically designed to allow landlords the option to release equity from their buy-to-let portfolio without remortgaging or selling.
It’s not the typical way to approach equity release – usually, older borrowers take these loans out against their own homes. The problem is, over time the interest on the loan builds up and eats into the equity in the property.
This often leaves children having to sell the family home to settle the debt when parents die, leaving far less inheritance than they might have expected.
Now, it’s possible to take an equity release mortgage out against a buy-to-let property, which usually has far less sentimental attachment for both parents and children – leaving the family home untouched.
Retirement Advantage has included an option to repay some or all of the interest monthly
An advantage of equity release over a traditional buy-to-let remortgage – which would be another option – is that there are no monthly interest payments. This makes it an interesting option for older landlords who want to increase their monthly income.
Equity release is usually structured with a drawdown facility, meaning you can take equity out of the property in stages, allowing you to pay for bigger one-off expenses or simply to give yourself a bit extra to spend or invest each month.
With equity release, the interest on the agreed loan is rolled up into the outstanding balance, with the full amount repaid on sale of the property or death of its owner.
The drawback as that as interest accrues, future interest is payable on the growing balance – meaning the debt in the property grows relatively quickly as a result of compound interest.
That said, Retirement Advantage has included an option to repay some or all of the interest monthly – either for part of the term of the loan or indefinitely – reducing the likelihood of the debt growing exponentially.
The deals are not a new concept but Retirement Advantage is currently the only lender offering equity release against buy-to-let properties. The firm has also launched a range for those wishing to release equity from a second home.
Tom Evans, of Retirement Advantage Equity Release, said: ‘As with our broader product range, these new offers will give customers real flexibility in deciding whether they service just the interest, make interest and capital repayments, or let the interest roll up.
‘These are exciting times for the equity release market, with growth at record levels. With demand increasing, innovation of this kind is integral to meeting the needs of people across the country.’
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What are the deals on offer?
Retirement Advantage’s Landlord Options range consists of three product options available to owners of buy-to-let properties.
You can choose whether to pay off any of your lifetime mortgage balance and, because the loan qualifies as equity release rather than a mortgage, there are no affordability checks on these products.
This means that you could qualify for this loan even if you have been turned away for a buy-to-let mortgage.
One of the deals allows you to repay up to 10 per cent of the initial loan amount each year without facing an early repayment charge.
It’s also possible to take one equity release loan against multiple buy-to-let properties.
The deals are available to landlords and second homeowners with any property in England, Scotland and Wales worth between £70,000 and £6million.
Properties above £6million are reviewed on a case by case basis. The minimum loan is £10,000 with borrowers able to release a maximum of £750,000.
You must be aged between 55 and 90 to qualify.
Retirement Advantage is currently the only lender offering equity release against buy-to-let
How do they compare?
No other provider offers the option to release equity on a buy-to-let in this way so there is nothing to compare these loans to – at the moment. It’s likely that other major providers will now look at this market and may follow suit.
The rate of interest depends on the equity released, property value and your age but one adviser, Adrian Anderson of mortgage broker Anderson Harris, estimates rates to be around 6.24 per cent.
This is much more expensive than interest rates on residential equity release, which have come down over the past few years to around 4 per cent on average.
Buy-to-let mortgage rates meanwhile can be cheaper still depending on the type of product taken – two year fixed rates can be less than 2 per cent.
This is Money verdict
Having the option to release equity on a buy-to-let or second home means that owners with the luxury of more than one property have more choice on how to manage their equity, which will be positive for some borrowers.
However, given this is the first lender back in the market offering buy-to-let equity release, the rates are still relatively expensive – and borrowers may find that other options make more financial sense.
If you can afford to repay interest monthly, then it could be worth looking at traditional buy-to-let mortgages, most of which rely on the rental income to assess affordability, sometimes supplemented by a landlord’s other income. This is highly likely to be a much cheaper way to release equity from a portfolio.
Older borrowers may struggle to qualify for ordinary buy-to-let, as many lenders place a restriction on the age of the borrower at the end of the mortgage term – for landlords in this position, equity release could be an alternative.
Adrian Anderson, director of mortgage broker Anderson Harris, said: ‘The minimum age for applicants is 55-years-old which is low, but the lender will only lend around 9 per cent loan-to-value to someone that age as interest would potentially compound over a very long period otherwise.
‘Older borrowers can borrow higher LTVs; a 70-year-old can borrow around 24 per cent while an 80-year-old can borrow around 34 per cent.
‘We believe this product will be targeted at those in their seventies and beyond as this is where conventional buy-to-let lenders do not tend to accept new applicants. The maximum age of a borrower is 90 – again, most buy-to-let lenders would not contemplate lending to someone this old.’
There are early repayment charges for the first eight years of the loan so it is not a short-term solution as the mortgage can’t be ported to another property.
Finally – under British law, any borrower taking out equity release on their home must get fully regulated financial advice before signing on the dotted line.
Even though buy-to-let is mostly an unregulated sector of the market, this rule applies to equity release on buy-to-let too.
This is Money would always suggest seeking professional and independent financial advice when making this sort of commitment as equity release can result in debt eating significantly into the value of your property.