Can I use equity from one property to finance another property purchase?

If you’re expanding your property portfolio, you might wonder if you can use equity from one property to acquire another. Using equity from an existing property is a common method to finance additional purchases.

This guide explains how property equity works, how lenders assess applications, and the benefits and risks of using equity to finance your next purchase.

What is property equity?

Property equity is the difference between your property’s current market value and the remaining mortgage balance.

For example, if your property is worth £350,000 and you owe £200,000 on your mortgage, your equity is £150,000. Equity is the portion of your property that you own outright and can potentially use to finance another purchase, either as a deposit or as security for additional borrowing.

Equity typically grows over time as you repay your mortgage and as property values rise. It’s one of the key advantages of owning property, giving you the flexibility to fund renovations, investments, or further purchases.

How can I use property equity to buy another property?

There are several ways to leverage your existing property’s equity:

1. Remortgaging your current property

By taking out a new mortgage or increasing your existing one, you can release cash that can be used as a deposit for your next property.

2. Second charge mortgage

Some lenders offer an additional loan secured against your existing property without replacing the main mortgage. This allows you to borrow against the equity for a new purchase.

3. Bridging finance

If you need to act quickly, such as at a property auction, you can utilise your equity as security for a short-term bridging loan. You can then repay the bridging loan once you’ve secured a longer-term mortgage.

Each option has different costs, eligibility requirements, and repayment terms, so it’s essential to evaluate and choose the one that best suits your circumstances.

How much equity can I release?

The amount of equity you can release depends on your property’s value, your existing mortgage balance, and the lender’s loan-to-value (LTV) limits.

Most lenders will allow you to borrow up to 75–80% of your property’s value. For example:

• Property value: £400,000
• Maximum LTV: 75% (£300,000)
• Current mortgage: £220,000
• Available equity to release: £80,000

Lenders will carefully assess affordability, especially if you’re using the equity for investment purposes. They’ll also consider your credit history, income, and other financial commitments to ensure you can handle repayments comfortably.

Lender considerations when using equity

Lenders will consider several factors when you want to use equity to finance another property:

• Loan-to-value (LTV) ratio: Lenders usually allow up to 75–80% LTV, depending on your situation and the property type.
• Rental or personal income: Rental income is considered for buy-to-let properties, whilst personal income is assessed for owner-occupied homes.
• Credit history: A strong record enhances approval prospects and interest rates.
• Existing debts: Lenders assess total debt to ensure repayments are manageable.
• Property type and location: Unconventional properties, flats above shops, or houses of multiple occupation (HMOs) may be subject to stricter criteria.

Understanding these requirements helps you prepare a smoother application.

Advantages of using equity to buy another property

Using equity from an existing property to fund your next purchase offers several benefits:

• Lower initial costs: You can fund a deposit without needing to save significant amounts of cash.
• Faster property portfolio growth: Accessing funds through equity allows quicker acquisitions.
• Flexibility: Equity can be released as cash or through remortgaging to suit your financial objectives.

This strategy can reduce reliance on personal savings and help investors capitalise on opportunities in the property market.

Risks and considerations

While accessing equity can be effective, it comes with potential risks:

• Increased debt: Borrowing against your property raises your monthly repayments and heightens your overall financial risk.
• Property market fluctuations: If property values fall, equity may decline unexpectedly.
• Interest rate rises: Increasing rates could make repayments more expensive.
• Over-leveraging: Using too much equity may restrict your options for additional purchases.

Careful planning and a realistic assessment of your finances are essential for managing these risks.

Summary

Using equity from one property to finance another can be an effective way to expand your portfolio without relying on cash savings or saving a deposit. It allows you to unlock value you’ve already built and use it to generate further returns.

However, like any form of borrowing, it should be approached with caution. Assess your affordability, consider your risk exposure, and seek independent financial advice if necessary. When carefully planned, leveraging equity can be a sensible, sustainable way to build long-term wealth through property.