By When landlords consider buy-to-let equity release, remortgaging might come to mind as the obvious route. But having equity available in your property does not mean that replacing the existing first charge mortgage with a new, larger one is the best way to access it. If the existing first charge mortgage is competitively priced, still has years to run and carries a significant early repayment charge (ERC), for example, remortgaging may not make sense. The question that should be asked in such a situation is, what alternatives are available for releasing equity while retaining the existing first charge mortgage.
Alternatives to remortgaging for releasing buy-to-let equity
1. Second-charge mortgage
A second-charge mortgage allows landlords to borrow against a property that already has a first charge buy-to-let mortgage. The second charge loan is separate borrowing that sits behind the existing mortgage in payment priority in the event of a default without disturbing it. The landlord retains the first facility and takes an additional loan secured with a second charge.
Second charge mortgages typically have higher mortgage rates than first charge mortgages, but the higher rate applies only to the additional borrowing. For landlords with a competitive first charge mortgage deal with some years to run and significant ERCs, considering a second charge mortgage may be worthwhile.
Second charge lenders typically need the first-charge lender’s consent to register their charge with HM Land Registry behind the first charge, and they often limit the combined borrowing across the first and second charges to a maximum of 75% LTV for buy-to-let properties. They typically also assess rental coverage to ensure that the property will generate enough income to cover both payments.
2. A further advance for from the existing first charge lender
In a further advance, the landlord borrows additional funds from the existing mortgage lender while the original mortgage is preserved. The additional borrowing may be on different terms than the existing facility as a separate mortgage account or loan with its own mortgage rate and payment terms.
The availability and permitted uses of a further advance depend on the lender in question, and the landlord can only access the products and criteria offered by that lender. The application will typically also be subject to fresh underwriting, which may include new affordability and credit checks. A further advance may be a suitable route for landlords who wish to retain their existing first charge mortgage and whose current lender also offers reasonable terms for additional borrowing.
3. Bridging loans
Bridging loans usually address a slightly different requirement, providing a short-term secured facility against the property. A bridge is typically used for a temporary funding gap requiring a quicker solution than longer-term funding can provide. Common uses include purchasing auction property or acquiring property ahead of refurbishment.
Bridging loans can be arranged as either first or second charge loans, depending on the landlord’s situation and needs. A second-charge bridge is used where there is an existing mortgage and a first-charge bridge is used on unencumbered properties or in situations where the bridging finance replaces the existing mortgage entirely. As bridging is usually intended to solve a short-term timing issue, a landlord must have a credible route to repayment.
4.Equity partnerships for landlords
Landlords may also consider an equity partnership model as an alternative route to releasing equity without disturbing an existing first charge mortgage. A fixed-term equity partnership arrangement, like Pauzible’s, allows landlords to release capital from their buy-to-let property while retaining ownership of the property and keeping their existing first charge mortgage in place.
The partnership arrangement is secured against the property, and the term can be structured over two, three or five years. The arrangement includes a monthly rent share and monthly interest cost, the latter of which can be paid on an ongoing monthly basis or deferred until the end of the loan term. Landlords can also choose whether the final repayment amount is fixed upfront or linked to the property’s value. The arrangement can be settled before the end of the agreed term, subject to the applicable repayment calculations.
How do buy-to-let equity release routes compare?
| What happens to the existing first charge mortgage? | How is equity accessed | Typical use case | |
| Remortgage | Existing first charge mortgage is replaced | A new, larger first charge mortgage repays existing balance and releases additional capital | Landlords approaching the end of an existing deal or where refinancing the whole balance makes sense |
| Further advance | Existing first charge mortgage stays in place | Current lender provides additional borrowing alongside the original mortgage | Landlords whose existing lender is willing to provide the amount required on competitive terms |
| Second charge mortgage | Existing first charge mortgage stays in place | A separate lender advances a further loan secured behind the first charge mortgage | Landlords who want to preserve an existing first charge mortgage while raising additional capital |
| Bridging finance | Can vary depending on how the facility is structured | Short term finance is secured against the property and repaid through a defined exit | Time sensitive purchases, auction acquisitions, refurbishment projects or temporary funding gaps |
| Equity partnership | Existing first charge mortgage stays in place | Pauzible provides capital through an equity partnership secured against the property | Landlords wanting to access property equity for business purposes without replacing an existing first charge mortgage |
Ultimately, there is no single answer to buy-to-let equity release. For one landlord, replacing the first charge mortgage may be straightforward. For another, keeping a favourable first charge mortgage may make a second charge or a different financing structure more appropriate.
Considerations include:
- The amount of capital needed
- The period for which it is required
- Costs
- Monthly impact on cash flow
- Exit strategy
- What happens to the existing first charge mortgage
There are various options for releasing buy-to-let property equity. The important question is not simply how to access it, but which financing structure best fits the purpose and term for which the capital is required.
This article is for general information only and does not constitute financial advice. Eligibility, costs and suitability depend on individual circumstances and provider criteria. Landlords should seek appropriate professional advice before entering into any financing arrangement.
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