Are you a retiree dreaming of a second home, whether to be closer to family or to enjoy a favourite holiday spot? Equity release could be the key to making that dream a reality.

According to Property Industry Eye, buying a second home is the 5th most popular reason why retirees turn to equity release.¹

Whether for a permanent move, a rental opportunity, or simply diversifying your assets, this guide will walk you through the 7 essential steps to fund your second home using equity release.

Let’s get started on making your dream come true…

What Is Equity Release?

Equity release is a financial product that enables homeowners, typically aged 55 and over, to unlock the value of their property by accessing tax-free cash while continuing to live in their homes.

This is usually achieved through 2 main types of schemes:

• Lifetime mortgages allow you to borrow against your home’s value with no immediate repayment obligation—the loan and interest are repaid when the property is sold, usually after you pass away or move into long-term care.
• Home reversion plans involve selling a portion of your property in exchange for a lump sum or regular payments, while still retaining the right to live in the home. Repayment is deferred until the property is sold.

Both options offer financial flexibility, allowing you to enjoy your home’s equity without the need to move.

Can I Actually Use Equity Release to Buy a Second Home?

Yes, you can use equity release to buy a second home, and by unlocking the value of your primary residence, you can access funds to purchase a second property without needing to sell your current home.

However, it’s important to understand the potentially negative financial implications and that using equity release to buy a second home may limit your options for future borrowing.

So, before proceeding, it’s best to consult a financial adviser who specialises in equity release, as they can help you assess whether this option aligns with your goals and explore alternative strategies if needed.

7 Steps to Follow When Using Equity Release to Buy a Second Home

When using equity release to buy a second home, it’s essential to follow steps like evaluating your equity, consulting financial advisers, and securing legal guidance to ensure a successful purchase.

Here’s our 7-step guide to help you navigate this process:

#1. Assess Your Eligibility

To qualify for equity release, you must be 55 years of age or older, and your property’s value and condition must meet the lender’s criteria; this initial step is crucial to determining if you are eligible.

Most lenders require that your home be in good condition and have a minimum value, typically around £70,000.

Additionally, any outstanding mortgages will need to be repaid before you can proceed with equity release.

#2. Consult an Equity Release Adviser

Seeking professional advice is essential to understanding your options and the implications of equity release; an experienced adviser can guide you through the different types of equity release products available, ensuring you make an informed decision.

They will also explain the potential impact on your estate, inheritance, and any means-tested benefits you may receive.

Consulting an adviser helps you navigate this complex financial decision with confidence.

#3. Choose the Right Equity Release Product

Having considered the option between lifetime mortgages and home reversion plans in the earlier part of the article, it’s best to choose the product that best fits your financial situation and goals.

Focus on the specific terms, interest rates, and repayment conditions of each option to ensure they align with your needs—whether you prefer the flexibility of a lifetime mortgage or the structured nature of a home reversion plan, selecting the right product is key to maximising the benefits of equity release.

It’s important to consult with your financial adviser to confirm that your chosen option is the most suitable for your circumstances.

#4. Get a Property Valuation

Arrange for a professional valuation of your primary home; this valuation will determine the amount of equity you can release, giving you a clear picture of the funds available for your second home purchase.

To ensure accuracy and fairness, it’s advisable to use an independent surveyor for an unbiased assessment of your home’s value—your equity release options ultimately depend on this.

#5. Apply for Equity Release

Complete the application process with your chosen provider, ensure all required documents are submitted, and check that you have everything in order for a smooth approval process.

This step often includes a legal consultation to ensure you fully understand the terms and conditions of your equity release plan.

#6. Receive the Funds

Once your equity release is approved, you’ll receive your tax-free lump sum. These funds can then be used to purchase your second home, enabling you to move forward with your plans.

Depending on your financial needs and the terms of your agreement, you can choose to receive the money as a lump sum, a regular income, or a combination of both.

This flexibility allows you to tailor the disbursement to suit your specific situation.

#7. Complete the Purchase of Your Second Home

Proceed with the standard property buying process using the released funds to cover the purchase and associated costs.

Finalise the acquisition of your second home, which may include paying for stamp duty, legal fees, and any necessary renovations or furnishings.

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

The pros of using equity release to buy a second home include unlocking tax-free cash from your primary property, avoiding monthly repayments, and retaining ownership of both properties, offering financial flexibility in retirement.

Take a look at 4 key pros below:

#1. Access to Additional Funds

If buying a second home is a goal but financing the purchase seems out of reach, equity release can be the key to accessing additional funds.

However, consider and weigh up the following:

• If you anticipate needing long-term care and plan to use home equity to fund it, think carefully before using equity release for a second home.
• Be aware that repaying the loan from your home’s sale will reduce the inheritance available to your beneficiaries.

#2. No Monthly Repayments

Equity release provides the benefit of no monthly repayments, easing the burden on your cash flow.

The loan and accumulated interest are typically repaid from the sale of your home after your passing or when you move into long-term care.

With a lifetime mortgage from a member of the Equity Release Council (ERC), you have the option—though not mandatory—to make monthly interest or principal repayments if you choose to, which can help manage the overall debt.

#3. Retain Ownership of Your Home

Equity release allows you to retain ownership of your primary home while accessing a portion of its value as cash, and with a lifetime mortgage, you still have the option to sell your home.²

If you’re working with an ERC member, you may benefit from a loan transfer to a new home or penalty-free repayment through Downsizing Protection.³

However, selling your home for other reasons may incur Early Repayment Charges, so it’s important to understand the terms before proceeding.

#4. Potential for Property Appreciation

If your home’s value increases over time, it may have the potential for property appreciation; you might be able to release additional funds or reduce the impact on the inheritance left to your beneficiaries when you pass away.

This potential benefit does not apply to home reversion plans, though—with this type of arrangement, you sell part or all of your property to a provider, which means you won’t benefit from any increase in property value on the portion you’ve sold.

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

The cons of using equity release to buy a second home include accumulating interest over time, reducing the inheritance left to heirs, the potential impact on means-tested benefits, and limited flexibility if property values decline.

Let’s evaluate the 4 main drawbacks:

#1. Reduced Inheritance

Equity release will reduce the equity left in your home, meaning you’re likely to end up with reduced inheritance upon your death.

However, if you use equity release to provide a living inheritance and live for more than 7 years after making the gift, your beneficiaries may benefit from the equity without being liable for Inheritance Tax.⁴

This approach allows you to support your loved ones during your lifetime while potentially reducing tax implications on your estate.

#2. Effect on Means-Tested Benefits 

Equity release can affect your eligibility for certain means-tested benefits, such as Universal Credit, and should be carefully considered before proceeding with this type of loan.⁵

An experienced equity release adviser can help you assess the potential effects on your benefits and guide you in making an informed decision.

#3. Cost of Borrowing

The cost of borrowing when it comes to equity release reflects that it can be one of the more expensive ways to secure funds during retirement.⁶

Interest rates on equity release mortgages tend to be higher than those on traditional mortgages and many borrowers choose to let the interest accrue on a compound basis—this means the interest is added to the overall loan balance.

#4. Limiting of Borrowing Options

After taking out an equity release loan against your home, your ability to secure additional loans using the property as collateral may be limited.

This can occur if you borrow too much initially, leaving insufficient equity for future needs later in retirement.⁷ 

Ultimately, using equity release to buy a second home is a long-term commitment that can limit your financial options in the future, so ensure you’re thinking carefully about your current and future financial needs before proceeding.

How Can You Choose an Equity Release Provider to Buy a Second Home?

To choose an equity release provider for buying a second home, compare interest rates, product flexibility, and customer reviews, and consult a financial adviser to ensure you select the best option for your needs.

Let’s look at further tips to help you with your decision:

Researching Providers & Plans

When considering equity release, comparing providers and their offers is important, focusing on their features and customer reviews on popular platforms like Trustpilot.

Consulting an Equity Release Adviser

After your research, consult a respected and experienced equity release adviser to guide you further, as they can help you find a deal with the features and interest rate best suited to your needs.

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

When selecting an equity release plan for a second home, look for features like flexible drawdown options, competitive interest rates, a no negative equity guarantee, and clear terms regarding the impact on your estate and inheritance.

Before applying, ensure the plan includes these non-negotiable features:

• Competitive Interest Rate: Look for plans with a competitive interest rate. For accurate comparisons, consult APR interest rates, which include fees.
• Flexible Repayment Options: Choose a plan that allows for interest and partial principal repayments as needed, in line with the Equity Release Council (ERC) standards.
• No Negative Equity Guarantee: This ensures you will never owe more than the value of your home, a critical safeguard required by the ERC.
• Portability: The plan should allow you to move the loan to a new property, provided the property meets the lender’s criteria, as required by the ERC.

While not mandatory, consider plans that offer Downsizing Protection; this feature allows you to repay your equity release loan penalty-free if you decide to move to a smaller home that doesn’t qualify for porting the loan.

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

Buying a second home with equity release may involve stamp duty, capital gains tax upon selling the property, and potential inheritance tax implications.

However, the funds released are generally tax-free, but consulting a tax adviser is recommended for personalised advice.

Here’s what you need to know:

Stamp Duty on Second Homes

When you purchase property or land valued over a certain threshold in England or Northern Ireland, you will typically need to pay Stamp Duty Land Tax (SDLT).⁸ 

In Wales, this tax is known as the Land Transaction Tax (LTT)⁹, and in Scotland, it is called the Land and Buildings Transaction Tax (LBTT).¹⁰

To calculate the stamp duty payable on purchases in England and Northern Ireland, you can use the official SDLT calculator.

Capital Gains Tax on Your Second Home

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

However, if you sell your second home and make a profit, you will be liable to pay Capital Gains Tax on the gains from the sale.¹¹

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

Alternatives to using equity release for buying a second home include remortgaging your primary property, taking out a buy-to-let mortgage, using savings or investments, or considering a personal loan.

Here are some additional options to consider:

• Selling Unused Assets: Consider selling items like a car or other valuables to secure funding for your second home.
• Generating Income: Rent out rooms in your primary residence to generate additional income that can help finance the purchase.
• Budgeting: Tighten your budget and reassess your spending habits to free up cash for buying a second home.
• Retirement Interest-Only (RIO) Mortgage: Explore a RIO mortgage, where you make monthly interest payments, with the principal repaid at the end of the term, as an alternative to equity release.

Common Questions

In Conclusion

Using equity release to buy a second home is possible, but it’s important to weigh your options due to the various pros and cons.

Equity release can be costly, particularly when interest rates are high, and may not be ideal for everyone.

If leaving an inheritance is not a concern, it 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.