Investing in buy-to-let property can provide a regular source of rental income, plus a potential long-term capital growth from any increase in the property’s value. It’s for this reason that many people use buy-to-let as a way of funding their retirement.
However, if you’ve been considering starting a property investment company, you’ll need to first find the funds to do so.
If you don’t have sufficient funds in savings or investments, you could consider using some of the equity, or value, in your existing home. Providing you have enough equity in your home, this could be a great way of enabling you to expand your property portfolio.
How to use the equity in your home to fund buy-to-let deposits
Popular ways to access the equity you’ve built up in your home include taking out a loan that’s secured against your property – often known as a homeowner loan or second charge mortgage – or remortgaging.
If you choose to apply for a homeowner loan with Selina, you’ll borrow a fixed sum of money to be repaid over a set term in fixed monthly instalments.
Alternatively, if you decide to remortgage, you’ll need to ask your mortgage lender to add the amount of equity you want to release to your new mortgage. You then repay the amount borrowed in monthly instalments over the remainder of your mortgage term. Remortgaging might involve paying solicitors’ fees or an early repayment charge if you need to get out of your existing mortgage deal before the end of the term.
If you’re not sure whether a secured loan or remortgaging is right for you, another option could be a HELOC.
The HELOC alternative
A home equity line of credit, or HELOC, works slightly differently to a standard secured loan or remortgage. You still borrow against the equity that you’ve built up in your home, but the funds are received as a line of credit, rather than a lump sum. HELOCs are commonly used by homeowners in the US, Canada and Australia, but Selina is the first provider to offer them to homeowners in the UK.
If you apply for a HELOC with Selina, you can borrow between £10k and £500k. You will then be given a five year ‘flexible’ period during which you can draw on your funds, up to your agreed limit, repay (in part or in full) and then redraw.
This flexibility can be beneficial if you wish to expand your buy-to-let portfolio, as you’ll be able to draw on funds as and when you want to purchase another property – so long as it is within your flexible period and you do not exceed your agreed limit.
Another benefit is that if you don’t need to use all of your funds, you won’t pay interest on any amount you’ve left untouched. Instead, you will need to repay the amount you have borrowed, plus interest, during the repayment term. If you want to pay off your loan earlier than planned, or pay more than your usual monthly amount, you can do so without paying an early repayment charge. Note, however, that a one-off product fee of £1,395 will be payable if you apply for a HELOC with us.
What is the best option if I want to purchase a buy-to-let property?
Both a Homeowner loan and a HELOC can be great and suitable options. Whether you want to expand your portfolio or want to buy a single investment property might help knowing what’s better. In any case, your advisor will help you choose the product that is best suited to your needs and circumstances.
Some of the advantages of using a Homeowner loan include:
- If you know how much the deposit is, you may want to borrow this exact amount so you can get all your funds on day 1
- You will get more visibility on your repayments as they won’t fluctuate like they can with a HELOC (due to its flexibility)
Some of the advantages of using a HELOC include:
- You may be able to put down a larger deposit for your second property, and expand your property portfolio more quickly
- You can draw on funds as and when you need to, up to your agreed limit and will only pay interest on the funds you use
- You won’t pay an early repayment charge if you want to pay off your loan early
Think carefully before securing other debts against your home. Your home may be repossessed if you don’t keep up repayments.
Who can apply for a HELOC or a Homeowner loan with Selina?
As with most forms of borrowing, to qualify you’ll need a good credit score. You will also need to be a homeowner and be on the title deeds of the property, and you will need to be a UK resident with at least three years of address history. Minimum income requirements apply too.
Finally, your security property must:
- Have a minimum value of £100,000
- Be owned by you for a minimum of six months
- Be within an 85% maximum Combined Loan-to-Value (CLTV) – this means your outstanding mortgage plus any other loan secured against the property (including a HELOC) shouldn’t exceed 85% of the value of your property
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