How Does a Buy-to-Let Lifetime Mortgage Work in 2024?

Certain equity release plans are designed for buy-to-let properties, enabling landlords to unlock capital from their investment properties. It's a niche but growing market segment.
  • Last Updated: 21 Mar 2024
  • Fact Checked
  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui
What Is the Process for Buy to Let Equity Release in the UK? Discover the Affordability Rules for Landlords and How Much You Can Borrow Using a BTL Mortgage. Find Out if It Is an Option for You.
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Key Takeaways…

  • Buy-to-Let equity release is a financial product in the UK that allows property owners over 55 to unlock the equity tied up in their rental properties without selling them.
  • It works by offering a loan against the value of your rental property, which is repaid when the property is sold, or upon your passing.
  • The main risks and benefits include potential erosion of inheritance and tax implications versus improved cash flow and maintenance of property ownership.
  • Generally, to be eligible in the UK, you need to be at least 55 years old.
  • Companies like Aviva, Legal & General, and Canada Life offer competitive plans, but it is advisable to investigate the market for the best deal.

If you are a landlord nearing retirement and exploring your options to secure your financial future, one possible consideration could be a Buy-to-Let equity release.

Equity release buy-to-lets allow landlords to access the value (equity) tied up in their rental properties whilst still benefiting from rental income—a practice known as ‘equity release’. 

This approach offers borrowers the flexibility of the Buy-to-Let investment strategy.1 

In This Article, You Will Discover:

    What Is Buy-to-Let Equity Release and How Does It Work in the UK?

    Buy-to-let equity release allows landlords to access their property’s equity without selling.

    How Is Equity Released for Buy-to-Let in the UK?

    The procedure for engaging in a buy-to-let equity release in the UK typically begins with a valuation of your investment property to establish its market value.

    It is advisable to consult with professionals for an accurate assessment of your property’s worth.

    Following this, the application for a buy-to-let equity release is made, which allows you to secure a loan with your property serving as security.

    In the UK, buy-to-let equity release schemes are designed with repayment strategies that consider the borrower’s financial situation.

    These often include the interest-only lifetime mortgage, where only the interest is paid during the term of the loan, and the roll-up lifetime mortgage, where interest accrues and is added to the total loan amount.

    A key feature of these schemes is that the repayment of the borrowed amount, along with any accumulated interest, is deferred until the property is sold, the owner passes away or enters long-term care.

    It is important to review the terms of repayment carefully to ensure they are compatible with your long-term financial objectives.

    Every Investor‘s experienced team researched later-life lending and retirement planning for over five years to assist landlords in deciding if a BTL lifetime mortgage is suitable for freeing up retirement cash. 

    Before sharing any content, the Every Investor team puts it through rigorous fact cross-checking and compliance checks to ensure that you receive accurate information.

    For the same reason, we also update our articles regularly.

    Therefore…

    What Is Buy-to-Let Equity Release?

    An equity release Buy-to-Let is a type of equity release scheme available to landlords who want to access equity tied up in rental properties while retaining ownership and generating rental income. 

    Landlords aged 55 or over can release a portion of their rental property’s value as a tax-free lump sum or regular income without the need for monthly repayments.

    The loan can be fully repaid upon the property owner’s passing or partially repaid during the loan term, depending on the borrower’s preference.

    Please note

    BTL equity release mortgages are not currently available to new borrowers in the UK*, but this may change as interest rates stabilise.

     *Accurate as of 11/06/2023.

    How Has Buy-to-Let Equity Release Evolved Over Time?

    The practice has expanded, adapting to changing market demands and regulatory landscapes.

    What Is the History of Equity Release in Buy-to-Let?

    The history of Buy-to-Let equity release stems from the demand for flexible equity release tailored to landlords. 

    This product combines a traditional lifetime mortgage with the Buy-to-Let strategy, potentially facilitating capital growth and financial stability in retirement.2

    Canada Life’s Over 55 Buy-to-Let Voluntary Select Option was an example of this type of mortgage, but this product has been withdrawn for the time being*.3 

    Consider…

    These products do not meet the Financial Conduct Authority‘s lifetime mortgage definition, meaning they may not provide the same level of protection.

    *Updated on 11/06/2023.

    How Do Buy-to-Let Equity Release Schemes Operate?

    A Buy-to-Let equity release scheme works very similarly to a normal lifetime mortgage, but it is a loan secured against your rental property or portfolio of rental properties instead of your primary residence.

    Unique features of these lifetime mortgages include…

    • Neither you nor any of your relations can live on the property.4
    • The property must be let out under an Assured Shorthold Tenancy (AST).5
    • The property can not be sublet.6

    Other features and requirements are shared with other lifetime mortgages. 

    These include…

    • There are no monthly repayments; instead, interest accumulates and is repaid, along with the original loan amount, upon the property’s sale or the landlord’s passing. 
    • Any existing mortgage balance must be settled using the funds generated from the new equity release mortgage. 
    • Cash can be released as a lump sum or through an initial lump sum with a cash drawdown option for accessing additional funds when needed.

    Make sure you understand your provider’s terms, as these may differ between lenders. 

    What Should You Consider Before Applying for Buy-to-Let Equity Release?

    Landlords should evaluate their financial situation, goals, and potential tax implications.

    What to Consider Before Applying for a Buy-to-Let Equity Release?

    What you should consider before applying for a Buy-to-Let equity release is, firstly, that this product is not as freely available as lifetime mortgages.7

    Other considerations… 

    • Some providers have temporarily withdrawn their BTL lifetime mortgages because of the current mortgage climate.8 Speak to an equity release broker or advisor to find out if there are any BTL options currently available to you.
    • Not all property types may be accepted, and the loan-to-value (LTV) ratio could be lower (around 44%, according to Saga).9
    • Interest rates on BTL mortgages may be higher than those on traditional lifetime mortgages.
    • Informing tenants about the mortgage can prevent surprises in the event of a property sale triggered by your passing or other circumstances.

    Consulting an equity release broker is advisable to determine if a landlord mortgage is the best financial option for you.

    What Are the Tax Implications of Buy to Let Equity Release?

    Buy to let equity release, a financial mechanism allowing landlords to access the equity tied up in their rental properties without selling, has notable tax implications in the UK.

    The income generated through equity release can affect one’s income tax, particularly if it increases an individual’s total taxable income into a higher bracket.

    Additionally, inheritance tax considerations come into play, as the reduction in property value due to a lifetime mortgage may decrease the estate value for inheritance purposes.

    However, it may also result in lower inheritance tax liabilities.

    Stamp duty does not apply directly to equity release, but landlords should be aware of potential capital gains tax if they decide to sell the property after its value has increased.

    It is essential for property owners to consult with a tax advisor to understand fully how equity release affects their tax situation.

    What Are the Eligibility Criteria for Buy-to-Let Equity Release?

    The eligibility criteria for Buy-to-Let equity release are similar to those of traditional lifetime mortgages.

    Therefore…

    What Property Types Qualify for Buy-to-Let Equity Release?

    When it comes to property type, these lifetime mortgages are usually available for houses, flats, and maisonettes. 

    Providers generally prefer well-maintained properties made of brick and mortar on freehold land. 

    However, restrictions may vary among providers, and seeking advice from an equity release broker is recommended. 

    What Is the Minimum Age for Buy-to-Let Equity Release?

    To qualify for this type of mortgage, the applicant (or the youngest person in a joint application) is typically required to be at least 55 years old, although some lenders may have higher age barriers.

    How Much Can You Borrow with a Buy-to-Let Equity Release?

    How much you can borrow through a Buy-to-Let lifetime mortgage depends on various factors, including your age and the value of the property. 

    Lenders typically offer LTVs ranging from 20% to 50% of the property’s value.

    How Can You Choose the Right Buy to Let Equity Release Plan?

    Choosing the right buy to let equity release plan requires careful consideration of several factors to ensure it aligns with the landlord’s financial goals and circumstances.

    Firstly, assess the lender’s reputation and the flexibility of their plans, including options for early repayment and the ability to make interest payments to manage the loan’s growth.

    Comparing interest rates and setup fees across different providers is crucial to minimising costs.

    Consider the plan’s loan-to-value (LTV) ratio to determine how much equity you can release and ensure it meets your financial needs.

    Additionally, understanding the implications on your tax position and estate planning is essential.

    Seeking advice from a financial advisor specialising in equity release can provide tailored recommendations based on your property portfolio, financial situation, and long-term objectives.

    What Costs and Repayment Options Are Associated With Buy-to-Let Equity Releases?

    Costs include interest rates and fees, with various repayment options available to suit different needs.

    What Are the Costs of Buy-to-Let Equity Release?

    The costs associated with the Buy-to-Let equity release include various fees that should be considered.

    These may include…

    • Application fees, which may be waived or added to the loan amount.
    • Valuation fees for property appraisal conducted by an independent surveyor.
    • Legal fees for appointing a solicitor to handle the necessary legal paperwork and protect your interests.
    • Arrangement fees, also known as administration or completion fees, can often be added to the loan.
    • Advice fees are charged by financial advisors, though they may be waived in some cases.

    Specific amounts vary among lenders and transaction complexity, so it is important to compare costs and seek independent financial advice to fully understand all expenses involved in obtaining a Buy-to-Let lifetime mortgage.

    What Interest Rates Apply to Buy-to-Let Equity Releases?

    The interest rates on Buy-to-Let lifetime mortgages vary among lenders and are typically fixed for the loan’s duration, although it is an irrelevant point at the moment, as no BTL lifetime mortgages are currently available to new borrowers*. 

    If additional borrowing is sought, a separate fixed interest rate will be determined for that portion. 

    Factors influencing the interest rate include the loan-to-value ratio and the landlord’s age. 

    Did you know? 

    Generally, these mortgages have higher interest rates than residential mortgages.

    For example, when Canada Life offered BTL products, the advertised rate was 7.78% APR.10 

    It is crucial to consider the interest rates offered by different lenders and the impact of these rates on the overall loan cost.

    *Accurate as of 11/06/2023.

    What Repayment Options Are Available for Buy-to-Let Equity Releases?

    The repayment options for the Buy-to-Let equity release offer flexibility and convenience. 

    There are no monthly repayments required, and instead, the accumulated interest and loan amount are repaid upon the landlord’s passing. 

    This structure allows landlords to benefit from rental income without monthly repayment obligations.

    However

    Some providers now offer the option to make repayments, such as up to 10% of the initial loan amount annually or monthly interest payments, if the landlord is able to do so.

    What Legal Considerations and Risks Should You Be Aware Of?

    Understanding the legal framework and potential risks is crucial to protect one’s investment.

    What Legal Considerations Should You Know About Buy to Let Equity Release?

    Engaging in buy to let equity release in the UK involves several legal considerations.

    Firstly, the ownership and regulatory compliance of the property are scrutinised, including adherence to safety and building regulations.

    Legal advice is crucial to understand the mortgage terms, especially concerning repayment obligations, rights to reside for tenants, and the impact on estate inheritance.

    Landlords must also consider the legal implications of changing property ownership or adjusting the terms of the equity release plan.

    Furthermore, it is important to be aware of any potential restrictions on selling the property or changing its use.

    Comprehensive legal counsel can help navigate these aspects, ensuring that the equity release plan complies with current laws and regulations whilst safeguarding the landlord’s interests.

    What Are the Risks of Buy-to-Let Mortgage Equity Release?

    The risks of a Buy-to-Let equity release mortgage include the effects of compound interest on your estate and the possibility of Early Repayment Charges.

    Some of the risks of this type of loan…

    • Interest Compounding: Without monthly repayments, the interest on the mortgage accumulates over time, resulting in a significantly higher loan cost compared to traditional mortgages; however, equity release providers affiliated with the Equity Release Council (ERC) offer a No Negative Equity Guarantee to ensure you never owe more than your home’s value.11
    • Impact on Inheritance: Any kind of lifetime mortgage reduces the inheritance passed on to beneficiaries. The loan, including accumulated interest, must be repaid from the proceeds of the property sale upon the landlord’s passing unless alternative funds are used for repayment.
    • Early Repayment Charges: Repaying the mortgage early or selling the property before the mortgage term’s end, often incurs substantial early repayment charges. Consider the possibility of full repayment during your lifetime before opting for a BTL lifetime mortgage.
    • Costs Involved: In addition to interest charges, there are various associated costs, including application fees, valuation fees, legal fees, and arrangement fees. These costs should be considered in the overall financial decision-making process.

    Consider the pros and cons of this type of lifetime mortgage very carefully.

    How Does Buy to Let Equity Release Compare With Personal Mortgages?

    Buy to let equity release and personal mortgages serve different financial needs and objectives.

    A personal mortgage is primarily designed for purchasing a residence where the borrower intends to live, whilst buy to let equity release is aimed at landlords looking to unlock the equity from rental properties without selling them.

    One significant difference lies in the assessment criteria: buy to let equity release schemes often evaluate the potential rental income of the property rather than the borrower’s income. This distinction allows property investors to leverage their assets despite their personal income levels.

    Furthermore, the interest rates and fees may differ due to the perceived risk associated with rental properties.

    In terms of flexibility, buy to let equity release can offer more adaptable repayment options, catering to the variable income that rental properties can generate.

    What Are the Benefits and Alternatives to Buy-to-Let Equity Release?

    Benefits include liquidity and investment growth, with alternatives such as re-mortgaging or selling.

    What Are the Benefits of Buy-to-Let Equity Release?

    The advantages of the Buy-to-Let equity release include having access to income in retirement and not being obligated to make repayments.

    Some popular benefits…

    • Possible Regular Income: Whilst cash released through a drawdown facility can provide a supplementary income to rental earnings, it is important to remember that interest starts accumulating with each withdrawal.
    • Tax Benefits: The cash released is tax-free, but consult with an equity release advisor to avoid potential tax liabilities.
    • No Monthly Repayments: Unlike traditional mortgages, BTL lifetime mortgages eliminate the need for monthly repayments, allowing landlords to maintain control of their cash flow and enjoy rental income.
    • Access to Cash: Landlords can tap into the equity tied up in their rental properties, providing funds for home improvements, debt consolidation, or other financial needs.

    Whilst a BTL lifetime mortgage has it’s benefits, speak to a qualified equity release advisor to consider the potential risks involved in this type of loan.

    What Are the Alternatives to Buy-to-Let Equity Release?

    Yes, there are alternatives to Buy-to-Let equity release that landlords can (and should) consider.

    These alternatives include…

    • Buy-to-Let further advance
    • Selling the rental property to release equity
    • Second charge
    • Re-mortgage12

    Each option has it’s advantages and disadvantages, so it is important to evaluate your circumstances and financial goals carefully before making a decision.

    How to Navigate the Future of Buy-to-Let Equity Release?

    Staying informed on market trends and regulatory changes is key to maximising benefits.

    What Are the Future Trends in Buy to Let Equity Release?

    The future of buy to let equity release is poised for growth, driven by an ageing population of landlords and a steady demand for rental properties.

    Technological advancements are expected to streamline the application and management processes, making equity release more accessible to property owners.

    There is also a trend towards more flexible and tailored financial products to meet diverse landlord needs, including hybrid plans that combine elements of traditional mortgages with equity release features.

    Additionally, regulatory changes may further shape the market, with potential for enhanced consumer protection and transparency.

    As the property market evolves, equity release could become a key financial strategy for landlords seeking to optimise their investment returns or fund retirement, indicating a shift towards more innovative and adaptable lending solutions in the buy to let sector.

    How to Apply for a Buy-to-Let Equity Release

    To apply, there is a set of steps you will need to follow. 

    A summary of what these steps entail…

    • Prepare Documents: Gather proof of identification, property ownership, and current mortgage agreements. Make sure what your lender’s particular documentation requirements are.
    • Consultation: Meet with an equity release advisor to assess eligibility and discuss your needs. Explore alternative financing options and involve your family in the decision-making process.
    • Personalised Illustration: The advisor will provide a detailed summary of costs and loan details through a personalised illustration.
    • Application and Legal Process: Complete the application with the advisor’s guidance. Appoint a solicitor and arrange an independent home valuation. Consult the solicitor for legal paperwork and the final decision.
    • Offer and Signing: The loan provider presents an offer through the solicitor. If you are satisfied, sign the mortgage deed.
    • Fund Disbursement: The released cash is transferred to your solicitor, who then deposits it into your bank account.

    The application process typically takes several weeks, but complex cases may extend to months.

    Frequently Asked Questions on Buy-to-Let Equity Release

    What is the Maximum Loan-to-Value Ratio for a Buy-to-Let Lifetime Mortgage?

    How Does a Buy-to-Let Lifetime Mortgage Affect My Tax Liability?

    Can I Apply for a Buy-to-Let Lifetime Mortgage if I Have an Existing Mortgage on the Property?

    What Happens if the Buy-to-Let Property's Value Decreases Over Time?

    Will I Be Able to Leave an Inheritance for My Loved Ones With a Buy-to-Let Lifetime Mortgage?

    Can I Switch to a Buy-to-Let Lifetime Mortgage From a Traditional Mortgage on My Rental Property?

    Can You Obtain a Buy-to-Let Lifetime Mortgage to Buy Another Property?

    Can I Obtain Several Buy-to-Let Lifetime Mortgages if I Have Several Rental Properties?

    Should I Repay My Buy-to-Let Lifetime Mortgage?

    Can I Sell My Property If I Have a Buy-to-Let Lifetime Mortgage?

    What is Buy to Let Equity Release in the UK?

    How Does Buy to Let Equity Release Work?

    What are the Risks and Benefits of Buy to Let Equity Release?

    Are there Age Restrictions for Buy to Let Equity Release?

    Which Companies Offer the Best Buy to Let Equity Release Plans?

    Concluding Thoughts on Buy-to-Let Equity Release

    Buy-to-Let lifetime mortgages provide a way for UK landlords to leverage their rental properties for financial gain. 

    Though currently not as available as traditional lifetime mortgages, these products offer potential advantages such as tax benefits and access to cash. 

    However, potential risks and costs should be carefully considered. 

    If you are interested in a Buy-to-Let equity release, consult a reputable equity release broker or advisor to find out what your options are in the current market.

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