Can You Buy a Second Home Using Equity Release in 2024?

Equity release can fund a second home purchase, offering a way to expand property portfolios without upfront capital—a strategic option that's dependent on your financial landscape.
  • Last Updated: 15 May 2024
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  • Our team recently fact checked this article for accuracy. However, things do change, so please do your own research.

Contributors:

Francis Hui
Can I Use Equity Release to Buy a Second Home in the UK? Find Out How Much Can Borrow Through Equity Release to Buy a Second Home and the Additional Factors to Consider. Read On...
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Key Takeaways…

  • Equity release can be a viable method to fund the purchase of a second home by leveraging the equity in your primary residence, though eligibility depends on meeting the lender’s criteria.
  • This financing method involves securing a loan against your primary home, which is repayable once the property is sold.
  • Primary risks include a decrease in your estate’s value and the possibility of negative equity if property values drop, but the benefits mean receiving a tax-free lump sum without the burden of monthly repayments, enjoying potential tax advantages, and converting property equity into usable funds.

Are you a retiree looking at equity release to buy a second home, perhaps to be closer to family or a popular holiday destination?

Property Industry Eye, an award-winning property trade magazine, reports that buying a second home is the fifth most popular reason why people choose equity release.1

As a leading equity release information portal, the team at Every Investor strives to offer the latest news covering the equity release market, and provided this article to help you consider what can you use equity release for, and if it is a good idea to use equity release to buy a second home. 

In This Article, You Will Discover:

    After studying the market, we have compiled this information on the pros and cons of equity release for buying a second home. This article has undergone strict compliance checks to ensure you are presented with the best available information.

    Our articles are also updated regularly for your ongoing benefit.

    Therefore…

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    • If you qualify for equity release.
    Equity Release for Second Home Purchase

    What Is Equity Release?

    For homeowners aged 55+, equity release is a pathway to unlock their property’s hidden financial value.

    It is a key strategy for acquiring funds whilst keeping their home.

    Through equity release, individuals can choose between a lifetime mortgage, borrowing against their home’s value, or a home reversion plan, selling a portion of their property, with no immediate repayment obligation.

    Can I Use Equity Release to Buy a Second Home in the UK?

    Equity release can be a viable strategy to fund a second home in the UK. As experts in this area, we can confirm that it allows you to unlock the value tied up in your primary property without having to sell.

    This way, you can access capital to make your second home purchase; however, it is crucial to note that equity release comes with certain conditions and potential drawbacks.

    You have to be 55 years or older, and it may affect your tax status and benefits. We recommend professional advice for personalised, informed decisions.

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

    You can use two types of equity release schemes to buy a second home: Lifetime mortgages and home reversion plans.

    A quick look at these two types…

    • Lifetime mortgages, the more popular option2, allow you to borrow against the value of your home and live in it as long as you wish. There are no monthly repayments because the loan’s principal and interest will be repaid upon your passing or relocation into long-term care.
    • Home reversion plans, the less popular option3, allow you to sell part or all of your home to an equity release provider while maintaining the right to live there until you pass away or enter long-term care. When the house is sold, the proceeds are divided proportionally among the owners.

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

    The pros of using equity release to buy a second home are varied but keep in mind that they should be considered in parallel with the cons.

    Access to Additional Funds

    If you have your heart set on buying a second home but have no way apart from equity release to finance the purchase, you may be able to benefit from your home’s equity during your lifetime, as the loan will only have to be repaid upon your passing.

    On top of that, you will still be living in the home from which you have released the equity.

    Things to consider…

    If there is a possibility of your needing long-term care before your passing, and using home equity to fund it, think carefully about using equity release for a second home.

    Also, be aware that repaying the loan from your home’s sale will reduce the inheritance available to your beneficiaries.

    No Monthly Repayments

    Equity release offers relief from monthly repayments, easing the burden on your cash flow, as the loan and interest are repaid from the sale of your home after your passing or when moving into long-term care.

    Good to know…

    With a lifetime mortgage from a member of the Equity Release Council (ERC), although not mandatory, you can opt to make monthly interest or principal repayments if desired.4

    Retain Ownership of Your Home

    With equity release, you keep ownership of your primary home whilst accessing a portion of it’s value as cash. 

    If you have a lifetime mortgage, you could even sell your home.5 (ERC members allow loan transfer to a new home or penalty-free repayment with Downsizing Protection6, but other reasons for selling may incur Early Repayment Charges.)

    Potential for Property Appreciation

    If your home’s value increases over time, you may be able to release additional funds or lessen the impact on the inheritance left to your beneficiaries when you pass away.

    Take note…

    This does not apply to home reversion plans, as this type of arrangement requires you to sell part or all of your property to a provider, which means you will not benefit from an increase in property value on the property share you have sold. 

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

    The cons of using equity release to buy a second home are important to consider alongside the pros. 

    We can now evaluate some of these drawbacks.

    Reduced Inheritance

    It has been explained that equity release will reduce the equity left in your home that can be left to your beneficiaries upon your death.

    However, if you have used equity release to provide those beneficiaries with a living inheritance and you live longer than seven years after making the gift, they will benefit from the equity in your home without having to pay Inheritance Tax.7

    Effect on Means-Tested Benefits 

    Equity release will have an effect on your eligibility for certain means-tested benefits8 (including Universal Credit9), which should be considered before you proceed with this type of loan.

    An experienced equity release advisor will be able to help you assess the potential impact equity release may have on your benefits.

    Cost of Borrowing

    Equity release can be one of the more expensive ways to secure funds during retirement.10

    This is because interest tends to be charged at a higher rate on equity release mortgages than on traditional mortgages11 and because some borrowers opt to let the interest accrue on a compound basis12 so it is eventually repaid along with the principal amount upon their passing or when they move into long-term care.

    Limiting of Borrowing Options

    Once you have taken out an equity release loan against your home, you may not be able to secure any other loans using that property as collateral. 

    This may happen if you borrow too much at once and do not have enough equity left if you need more funds later on in your retirement.13 

    Remember…

    Using equity release to buy a second home is a long-term commitment that can limit financial options in the future.

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

    To choose an equity release provider to buy a second home, compare plans and features from different companies. 

    As most providers are now ERC members, differentiating factors may be limited; nonetheless, you still need to decide on a provider. 

    Some tips to help you with your decision…

    Researching Providers

    Very simply, when you are looking into equity release, you should compare the products lenders offer in terms of their features, as well as customer reviews on a popular platform like Trustpilot.

    Once you have researched these, you need to consult a respected and experienced equity release advisor to help you further your investigation. 

    An advisor can help you locate a deal that offers the features and interest rate best suited to your needs.14

    Key Features to Look For in an Equity Release Plan for a Second Home

    Some basic, non-negotiable features should be included in any equity release plan before you consider applying for it.

    These include…

    • The plan should offer a competitive interest rate. Consult APR interest rates, which include fees, for accurate comparisons.
    • Look for plans that allow interest and partial principal repayments as needed, as required by the ERC.
    • The plan should include a No Negative Equity Guarantee as required by the ERC. This ensures that you will never owe more than the value of your home.
    • The plan should include the right to move the loan to a new property provided the property is acceptable under the lender’s criteria, as required by the ERC.
    • Although this does not need to be considered non-negotiable, many providers now offer Downsizing Protection, a feature that will allow you to repay your equity release loan penalty-free should you decide to move to a smaller home not suitable for the porting of the loan.

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

    The tax implications of buying a second home with equity release are relatively straightforward. 

    The funds you secure through equity release are untaxed, and should you choose to, you could use all of it to buy a second home.

    However, purchasing a second home does come with potential tax implications you should be aware of.

    Stamp Duty on Second Homes

    When you buy property or land valued over a certain threshold in England or Northern Ireland, you will usually need to pay Stamp Duty Land Tax (SDLT).15 

    In Wales, you may need to pay what is known as Land Transaction Tax (LTT)16, and in Scotland, the levy is called the Land and Buildings Transaction Tax (LBTT).17 

    You use this calculator to determine the stamp duty payable on purchases in England and Northern Ireland.

    Capital Gains Tax on Your Second Home

    The money you access through equity release is not taxed, which means taking out equity release on your primary residence will not affect your Capital Gains Tax position.

    However, if you sell your second home and make a profit on the sale, Capital Gains Tax will be due.18

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

    The alternatives to using equity release to buy a second home are worth exploring, especially when interest rates are unusually high.

    Here are some options to consider…

    • Consider selling unused assets like a car or valuable items to secure funding for your second home.
    • Generate income by renting out rooms in your primary residence to finance the purchase of your second home.
    • Tighten your budget and assess your spending habits to free up cash for buying a second home.
    • Instead of equity release, explore a Retirement Interest-Only (RIO) mortgage, where you repay monthly interest, and the principal is paid at the end of the term.

    Common Questions

    Can I Rent Out My Second Home Bought With Equity Release?

    Can I Release Equity From a Second Home I Already Own to Buy Another Property?

    What Happens if I Change My Mind About Using Equity Release to Buy a Second Home?

    What Happens if the Value of My Home Decreases After Using Equity Release to Buy a Second Home?

    Can I Switch Equity Release Providers After Using It to Buy a Second Home?

    Can I Use Equity Release to Buy a Second Home for My Child or Grandchild?

    Are There Any Restrictions on the Type of Second Home I Can Buy With Equity Release?

    How Does Equity Release Work If I Want to Sell My Second Home in the Future?

    What Fees Are Associated With Using Equity Release to Buy a Second Home?

    Can I Use Equity Release to Buy a Second Home?

    What Are the Risks of Using Equity Release to Purchase a Second Property?

    How Does Equity Release Work When Buying a Second Home?

    Is It Possible to Use Equity Release Schemes for a Second Property Purchase?

    What Are the Benefits of Using Equity Release to Fund a Second Home Purchase?

    In Conclusion

    Whilst equity release can be beneficial in certain situations, it may not be ideal for everyone. It can, for instance, be costly, particularly when interest rates are high in a tough mortgage market. 

    However, if leaving an inheritance is not a concern because you do not have heirs to pass it on to, using equity release to buy a second home could be a viable option.

    Consulting a qualified equity release advisor is one of the best ways to decide whether getting equity release to buy a second home would suit your particular needs.

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