The Pros and Cons of Equity Release for Property Investment

Have you considered equity release for property investment? Raising capital to start your property investment portfolio can be difficult. You can use savings, you may have been willed a sum of money by a relative, or you may have a surplus income that you can use to get the necessary funds together.

These are perfectly valid ways of raising finance, but your biggest asset- your home- may also be a route that you can take to generate capital.

This is one possible model for equity release for property investment.

Mr. and Mrs. X have decided that they want to build an extension. Let’s say it’s for a growing family. Their home is valued at £600,000 before the build, and £750,000 once completed. So they have immediately increased its value and available equity.

Here are the numbers:

1. The extension will cost £100,000. Mr. and Mrs. X borrow a further £150,000 totalling £400,000
2. They take the additional £150,000 as a deposit of £50,000 each for 3 rental properties. The remaining funding comes from buy to let mortgages secured on the rental properties(not on their family home)
3. After costs and expenses, each property yields a rent of £330 per month totalling £990.
4. Deduct the additional mortgage payment of £414.
5. £576 per month in profit remains from Mr. and Mrs. X’s new property portfolio

Mr. and Mrs. X then have the option of paying down the mortgage on their family home early, using their additional income for leisure, funding an early retirement or financing their children through university.

What are the pros and cons of equity release for property investment

Cons

1. You are liable for mortgage repayments on your home.

If the income from your property portfolio drops you might struggle. Managing a property portfolio has many positives, but it can be challenging. Having a contingency plan in place can help to mitigate any problems that you might face.

2. You may use a considerable amount of equity in your home, depending on its value

This very much depends on your own comfort level in terms of how much you are prepared to borrow against your home. But in the event that you may need to release equity for an emergency, you may be limited in what you can borrow. Especially if you can’t meet affordability checks.

3. Depending on your income you may not meet affordability checks

Any borrowing against your home will be through a residential mortgage. Lenders will require you to meet their affordability checks before they agree to lend to you. Depending on how much you want to borrow, your income, and your existing monthly mortgage payments you might struggle.

Pros

1. Equity release for property investment is a tried and tested model to raise funds

Business loans and other types of borrowing are more expensive than your monthly mortgage payments are likely to be. Especially with interest rates as low as they are at the moment. It's a tried and tested model for raising capital for investment in business or property.

2. There are tax advantages if you set your property investment business up right

The capital you release from your home can be set up as a loan to your business and be repaid tax-free. So you can reduce the tax liability on your rental income over a period of time and pay off the proportion of your mortgage that you funded your new business with. You will need to take professional advice to set up your property investment business so that you get this right.

3. You have rental properties to fall back on

Your insurance policy is your rental property. Loan to Value on buy to let mortgages is typically around 65% – 75% so you immediately have that plus any growth in the value of the property. If something goes very wrong and your home is under threat you will be able to sell those properties to protect you home rather than your family home.

Equity release for property investment is only part of the story

Of course, there are many considerations before you begging your journey to become a property investor. Understanding the risks is first and foremost, and your family must be in full support if you are to put your family home at any kind of risk.

The biggest mistake that first-time property investors make is to not treat their property portfolio as a business. For example, tax changes can impact the viability of investments if your business isn’t set up to mitigate any changes.

Read our blog about tax changes in 2020 that affect property investors

Taking professional advice from an accountant and property investment consultant can make the difference between success and failure. And it means that the structure of your business will be designed to maximise your income from your investments.

Here at Hawkhurst Invest, we take a pragmatic approach to your property investment ambitions. we run through a detailed cash flow forecasting process with you so that you can fully understand how developing a property portfolio will impact your finances- positively and negatively.

That allows us to work with you to understand where in the marketing you could target, the level of risk that is appropriate, and how we can help you realise your financial ambitions.