Can I Use Equity As A Deposit For Buy To Let?

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Can I use the equity I’ve accrued in my house as a deposit on a new property? It’s one of those questions that seems so straightforward you end up questioning whether or not you actually know the answer. Even if you are sure, there are further queries that spring to mind. How much equity do I have? What are my options for releasing it? Can I use the equity to invest in buy-to-let? Let’s find out the answers.

What Is Equity?

Before delving into whether you can leverage the equity in your existing home as a deposit for a new property, it’s crucial to grasp the concept of equity itself.

In its simplest form, equity represents the difference between the current market value of your home and the outstanding amount you owe to your mortgage lender.

Leveraging Equity as a Deposit

Equity can be a valuable asset that opens doors for various financial opportunities. One of the most common ways to utilize it is as a deposit when purchasing a new property. By using your existing equity in this way, you can effectively reduce the amount you need to borrow for your new mortgage, subsequently lowering your LTV (loan-to-value) ratio.

This reduction in LTV can be advantageous, as it broadens your scope for choosing from a wider range of mortgage products. However, it’s essential to be aware of a potential challenge that can arise – negative equity.

Negative equity occurs when the outstanding balance on your current mortgage exceeds the market value of your home. It’s a situation that could complicate your plans to use your existing equity for a new property purchase. Understanding the dynamics of equity, its benefits, and potential pitfalls is vital when considering property investment options.

What Is Negative Equity?

Negative equity is a situation that arises when the outstanding balance on your mortgage exceeds the current market value of your home. This scenario typically occurs when there’s a significant and sudden decline in house prices after you’ve purchased your property.

Implications of Negative Equity

Having negative equity can pose challenges in your financial planning. When faced with negative equity, it can become challenging to consider options such as remortgaging or selling your home and moving to a new one. The reason is that the value of your property is lower than the amount you owe on your mortgage, making these financial moves less viable.

Negative equity is a critical factor to keep in mind when making long-term decisions related to your property investment and financial stability. It’s essential to have a clear understanding of its implications and explore potential solutions when dealing with this situation.

Do I Have Equity In My Home?

Calculating your property equity is a straightforward process, but it requires up-to-date information. Start by researching the current market value of your home online. Look for recently sold properties in your area that are similar to yours to estimate your property’s value.

Next, review your most recent mortgage statement to determine your outstanding mortgage balance. If you don’t have a recent statement, contact your lender to obtain this information. Now, subtract your outstanding mortgage balance from your estimated property value. The result is your potential equity in the property. This equity can be used as a deposit for a new property or for various financial purposes.

Can you use equity in your property as a deposit on a new home?

Yes, you can use the equity accrued in your current home as a deposit for a new property. This is a common and practical approach for many homeowners. By leveraging your equity as a deposit, you reduce the amount you need to borrow for your new mortgage, effectively lowering your Loan to Value (LTV) ratio. A lower LTV opens up a wider range of mortgage options, including more favorable interest rates. Borrowers with lower LTV ratios often secure more affordable mortgages. It’s a straightforward and effective strategy for property investment.

Releasing equity from your home becomes most convenient during a remortgage, a favored choice for property investors seeking funds for new ventures. However, if your remortgage is not due soon or if Early Repayment Charges (ERCs) are still in effect, making early remortgaging expensive, you have an alternative: a further advance.

A further advance involves obtaining additional borrowing from your current lender, typically at a different interest rate than your existing mortgage. You can use this sum as your deposit for a new investment property. Then, when the time comes to remortgage your home, you can tap into your home’s equity to settle the further advance.

This approach offers a quicker path to secure a deposit for an investment property compared to the gradual accumulation of savings. Remember, buy-to-let property purchases often require a substantial deposit of at least 15-25% for access to favorable mortgage rates.

6 ways to release equity from your house

When you find yourself in positive equity, you may wonder how to utilize it effectively. Here are six practical methods:

Use It as a Deposit: If you plan to move, consider using your equity as a deposit for your next home.
Buy Your Next Home Outright: Alternatively, you can use the equity to purchase your next home without the need for a mortgage.
Remortgage: Opt for a remortgage to access your home’s equity.
Second Charge Mortgage: Explore the option of a second charge mortgage for additional borrowing.
Further Advance Loan: Consider a further advance loan from your current lender, using your home’s equity as collateral.
Equity Release Scheme: Explore equity release schemes as another avenue to tap into your accumulated home equity.