Equity Release

When considering financing the deposit and stage payments for an off plan purchase or the completion in an emerging country that is not offering mortgage facilities then equity release could be a viable option.

Using the term in its broadest sense it is the release of the equity that is locked in an existing property either because it was originally purchased in cash or it has accumulated in value over time. Although in some countries the term equity release may indicate a specific type of product the principle remains the same, i.e. releasing equity. In a rising property market the latent value inherent in the property could be considerable and this makes it ideal to be released and utilised for the next investment. Many successful investors have used this principle to build property portfolios over previous years.

This is done by either a re-mortgage (because there is an existing mortgage in place) or a new mortgage (on a debt free property) then using the cash released to finance the new investment.

The formula to calculate the equity is very simple:

Current value of property - current loan commitment = Accumulated equity

Case Study

A property was purchased 10 years ago at a value of 100,000 EUR with a mortgage of 60,000 EUR .
Today the property is valued at 225,000 EUR and the existing mortgage is now 50,000 EUR .
Therefore the accumulated equity has become 225,000 EUR - 50,000 EUR = 175,000 EUR .
There is potentially 175,000 EUR available to invest in another property or properties if creating a portfolio.

Portfolio Investments

This simply means investing in a number of properties rather than just one. They do not all need to be in the same development or even country so it allows the investor to spread the investments across different market places, thereby taking advantage of different growth rates and spreading the risk of those investments. In other words the investor is not relying solely on one development to be successful.

Using the example above:

Case Study

Our investor releases 80% of the 175,000 EUR equity available = 140,000 EUR for further investment.

4 properties are identified :

Properties A and B in Morocco are priced at 125,000 EUR each and require a deposit of EUR 25,000 each
Property C in Cape Verde is priced at 101,000 EUR and requires a deposit of 20,200 EUR
Property D in Spain is priced at 230,000 EUR and requires a deposit of 57,500 EUR
In total the investment is 581,000 EUR but the initial cash paid is 127,700 EUR . The balance of funds is used to cover initial legal costs.
Whilst the properties are being built the investor can choose to either hold on to all the properties and finance the balancing payments at completion by say a mortgage or put them up for sale and take advantage of a short term investment strategy.
The profits gained by the sale or sales could be used for another investment opportunity or fund the completion of one of the other properties.
When creating a portfolio of investments in this way it needs to be actively managed to ensure there is always sufficient cash to fund the next stage of the investment.

Sophisticated Finance Market

In northern European countries such as the UK, Ireland, etc the financial market place can be described as sophisticated, with a stable political, economic and property environment allowing banks to be more adventurous and confident in their lending policies.

Loans of 80% to 90% of the value of the property are available usually on an interest only basis as the lenders are aware that investors will use equity release for financing further investments but feel comfortable because their loan is secured against a stable asset.

The key factor is the affordability of these loans. Set up costs can be very low and as the loan is on an interest only basis the monthly repayments are also as low as possible, making this form of funding truly accessible to the majority of home owners.

For existing buy to let investors this allows rental income to cover the mortgage payments leaving a self funding asset appreciating each year until the equity is released.

In addition there is a greater number of self certification and non status finance products allowing equity to be released easily and quickly.

Please remember that your property is at risk if you fail to maintain the mortgage payments each month therefore consider the monthly repayment carefully.

Less Sophisticated Finance Market

In many emerging markets and even established markets such as Spain and Italy there is or has been a level of instability in the past which means that banks and lenders are more cautious in their lending policies often limiting the amount that may be borrowed or the purpose for which it may be borrowed.

In the case of new emerging markets finance may not be available for non residents yet.

Many investors have purchased property abroad over the past few years and have discovered the value over that time has increased significantly, potentially allowing equity to be released.

This is ideal when considering the next investment, however please be aware that equity release is a product seen in more sophisticated financial markets as already mentioned, therefore you may not be able to release as much from the property or as easily as you would have hoped.

It is important to obtain professional financial advice from an experienced mortgage of finance consultant in that country to establish what is achievable.