How does releasing equity to buy a second home work?
Equity is the money you own in your property — what you've paid off your mortgage plus any increase in home value. When you remortgage, you can release this equity by borrowing more than you currently owe. This can go towards a deposit on a second home, or, if it’s enough, to buy outright.
Here's how it works:
Let's say you bought a house for £200,000 and borrowed £160,000. You initially own £40,000 of it (your equity).
Fast forward five years. Your house is now worth £230,000 and you owe a remaining £140,000 on your mortgage. The difference between these numbers is £90,000, which is what you now own in equity.
When you remortgage, instead of keeping your loan at £140,000, you increase it to £170,000. That £170,000 pays off the £140,000 you owe, leaving you with £30,000 in cash (released equity).
You still own £60,000 in equity, which is locked in the home. (£90,000 - £30,000 cash)
You use that £30,000 as a deposit on a second property, then take out a separate mortgage for the rest.
Lenders will check if you can afford both payments. You'll also pay conveyancing fees for both the remortgage and the second property purchase, so budget accordingly.
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