Releasing equity from a buy to let property

You might own a buy to let property outright, with no mortgage (known as being “unencumbered”), or you might have a mortgage in place, but with a loan to value less than the maximum available in the marketplace. Either way, this puts you are in a good position to release equity from your buy to let property.

The process of releasing equity from a mortgaged or unencumbered property is to remortgage it (which can seem confusing terminology when there is currently no mortgage in place).

Releasing equity from a property is not to be confused with specific “equity release” products, where homeowners raise money against the value in their home in older age.

How releasing equity works

If you own a rental property outright, you can take out a buy to let remortgage to release the equity as cash, which can then be used for other investments or purposes.

If the property already has a mortgage, you will still need a remortgage product. In this case, you can increase the loan by the amount you want to access, as long as you stay within the lender’s maximum loan to value (LTV) limits.

In both cases, the property acts as security for the loan. This means the lender has the legal right to take ownership of the property if mortgage repayments are not maintained. That is why any mortgage-related information will include the statement: “Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.”

Loan to value limits

When your property is unencumbered, you are in a great position to borrow a large sum, as you can raise any amount up to the maximum loan to value for your property type.

If you already have a mortgage in place, you are restricted to the same maximum loan to value thresholds by property type, but you need to keep your total borrowing (i.e. the sum already being borrowed plus the new amount you want to raise) within the cap.

To calculate your current loan to value:

LTV (%) = Mortgage amount /Property value x 100

e.g. if you have a mortgage of £75,000 and your property is worth £250,000:

LTV = 75,000/250,000 x 100 = 30%

• Holiday lets can be mortgaged up to 80% of the property value
• Buy to let houses and flats can be mortgaged up to 85% of the property value
• Houses of Multiple Occupation can be mortgages up to 85% of the property value

Rental stress testing

The other factor that will impact the amount of equity you can release from your buy to let property is the rent it is making. Lenders are required to put in place financial protections for borrowers, which aim to ensure a mortgage remains affordable if mortgage interest rates change.

Lenders use a “stress rate”, which is higher than the actual interest rate you will pay, in a calculation to assess mortgage affordability.

Alongside the stress rate, the lenders will apply an “interest coverage ratio” to the calculation. This requires the monthly rent to exceed the actual monthly mortgage payment.

• For basic rate taxpayers the interest coverage ratio is often 125%.
• For higher rate taxpayers the interest coverage ratio is often 145%.

However, these ICRs can be higher depending on the property type (for example a more complex property type like an HMO may be higher) or other lender criteria.

Ways you can use equity released from your property

Releasing equity can be used to:

• Buy additional rental properties
• Fund renovations or refurbishment (which may help landlords on the approach to changes in minimum energy performance requirements, due to be in imposed in 2030)
• Repay other, higher-cost business or personal debts
• Invest in other ventures

Essentially the funds can be used for any legal purpose. Some lenders may be cautious if the funds are being used to settle a tax bill, or gambling debts, as these point to potential money-management challenges.

How landlords use equity to buy more property

For landlords who want to scale a portfolio, releasing equity tax-efficiently is often central to growth strategies. 

Some landlords will build their portfolios over many years, using multiple rental incomes to build up capital in cash and taking advantage of long-term capital appreciation (the value of the property rising over time) as growth in equity within the property.

You may choose to accelerate the growth in the equity within your property by taking capital repayment mortgages, which pay down the lump sum borrowed to buy the property, rather than just paying the interest.

Once a property has built up sufficient equity, you can remortgage to release some of that value as cash, which can then be used as a deposit for another buy to let purchase.

As well as rental income, buy to let properties come with costs, so this is why it can take time for equity to grow. Additionally, property prices do not always go up, so it is important to monitor all aspects of a portfolio before you release equity to buy more buy to let properties.

Risks of releasing equity

Increasing borrowing also increases leverage. Leverage is the proportion of the property owned by the lender, versus the amount you as the borrower own. As such releasing equity from buy to let property also increases risk. 

Where you own a smaller proportion of the property, the risk to you is greater, as property prices could drop and put you in what is called “negative equity”. Negative equity is where the property is worth less than the loan the lender has given you. 

So, when you release capital/equity from your property, you should balance the amount you release against rental income and interest rate risk.

Get expert help from buy to let specialists

To understand how much you can raise from your property, you can speak to our expert mortgage advisors, who will run rental stress test calculations and research live products in the marketplace to find out what your monthly mortgage costs would be.

You can enquire online or call us on the Freephone number at the top of this page.