Should I release equity from my property to re-invest?
Landlords who have owned buy to let property for some years will probably have built up some equity by now through capital growth. While some professional investors plan right from the start when they will release equity and what they’ll do with it, for most, it’s simply something they address as and when they realise there is a lump sum available to them.
You should always take expert financial advice before taking capital out of an investment but, fundamentally, there are three ‘good’ reasons to release equity:
- to reinvest it in such a way that it could increase your wealth over time
- to finance a project, such as funding a child through university
- to spend on something special that has been planned, like a wedding, family holiday or a new car.
In this case, we’re looking at the pros and cons of reinvesting the money in another Buy to Let property.
The important thing is to make sure that the rental income more than covers the increased mortgage, ideally being at least 150% of the monthly payment.
- If the money is reinvested in something that’s going to rise in value over time, it could work well for you. Imagine a property worth £200k with £100k equity in it and a £100k mortgage. If the market rose by 10%, that would be £20k growth and a 20% return on your £100k capital investment. But if you released £50k and used it to buy another property worth £200k, if the market rose by 10%, that would be a total of £40k growth on the same £100k capital – i.e. you’d have made twice the return, simply by moving the capital.
- Although your profits from rental income won’t double, because you will have a higher monthly mortgage payment, you should see a significant increase in your monthly earnings.
- By spending a relatively small amount - the costs associated with buying and getting the property ready to rent – you could substantially increase your returns over time. You’re using the equity your property investment has generated to build your wealth.
(Figures are simplified and tax is not taken into account.)
Possible risks and concerns
- Property prices could fall, as they have been doing recently in some regions, particularly London and the South East of England. You should always have enough equity to cushion yourself against falls of up to 15-20% (as in the last recession) to make sure you’re never in the position of having to sell when it’s not your choice.
- Mortgage rates could go up. If you release equity, your mortgage payments will increase, so you’ve got to make sure the rental income covers the mortgage with plenty to spare. The Bank of England base rate is expected to start creeping up in the next few years and mortgage interest rates will follow if not fixed, so – as with the equity - give yourself a decent monthly profit cushion.
- Remember that if another Buy to Let purchase would take your portfolio to four or more properties, you will have to comply with the new ‘portfolio landlord’ lending criteria that came into force at the end of September 2017. You will need to secure up-to-date valuations for your other properties and consider the deposit for any new purchase in the context of the whole portfolio being financed at no more than 75% loan to value.
Three steps to take now, if you have equity you could release:
- Make an appointment with a wealth manager or financial advisor. They will be able to look at all your various income sources and investments as a whole and advise you whether your capital could be working harder for you elsewhere. They should also advise on the most tax-efficient way to proceed.
- Consult a buy to let mortgage broker to make sure that any redemption penalty is going to be worth paying and find the best new mortgage product for your circumstances.
- Speak to a property professional to find out what kind of property would suit your investment needs. At Reeds Rains, our local Buy to Let experts can talk you through the market and help you decide on the most suitable purchase.
For more information about current buy to let mortgages, speak to one of our specialist mortgage advisors, either over the phone or face to face. You can also book a mortgage appointment at a time to suit you.
Your property may be repossessed if you do not keep up repayments on your mortgage
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