Equity release schemes in Portugal
Equity release schemes: not just to boast pensions
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blacktower.financial@portugalresident.com
Equity release is now a means of raising capital to help boost income in retirement. However, did you know that, here in Portugal, equity release schemes have no minimum age requirements?
This means that they are available to anyone who owns a property, worth at least 400,000 euros, for any purpose. One such purpose could be to acquire a second investment property and maybe even build a property portfolio.
In the UK, many ordinary people have been able to reap the rewards of the property boom by purchasing buy to let properties. Provided there is a clear indication that the property will be easily let at a commercial rent, UK banks and lenders are willing to provide high loan to value mortgages serviced by the rental income. This means that the landlord does not have to find a large deposit or have sufficient personal income to guarantee the buy to let mortgage loan repayments.
However, here in the Algarve, mortgages are not so flexible and generally the lender will require at least 20-30 per cent deposit, plus proof that the landlord has sufficient income to service the loan repayments without taking account of any rental income from the property.
Equity release schemes are different, though as under normal circumstances there are no monthly repayments required. Furthermore, up to 25 per cent of the property value can be raised without any proof of income or wealth. Higher sums of up to 40 per cent of property value can be raised, but subject to status. These factors make these schemes particularly attractive for anyone interested in building a property portfolio.
The example below assumes that an individual has a property in the Algarve, valued at 800,000 euros with no mortgage. Cash of 200,000 euros can be released and used to purchase a second property for 165,000 euros with all fees and taxes paid from the surplus cash released.
It also assumes that the second property is let at an average of 600 euros per month, throughout the year. This represents an income yield of 4.4 per cent. In addition, there may be substantial future capital appreciation in the property value.
By “gearing” the property purchase, further potential gains and income are possible. For example, the cash released in the above scenario could be used as a deposit on a more expensive property with a conventional mortgage providing the balance. The new mortgage would, of course, be subject to usual status requirements and require monthly interest repayments. Nevertheless, equity release may offer options otherwise unavailable.
Alternatively, subject to status, it may be possible to use an equity release scheme on both properties releasing 40 per cent on each. This would allow the second property of 425,000 euros to be purchased without any requirement for interest payments on either property and all fees and taxes paid!
Perhaps an obvious point to mention here is that it is imperative you do your research before buying an investment property. This is especially true if rental income is a pre-requirement. Seek professional advice from real estate and letting agents and other professionals. Do not be rushed into making a snap decision. Treat this property purchase like any other serious business proposition.
Questions to ask include:
What is the best type of property for letting and capital appreciation?
Which town or area is most suitable and perhaps a future “hot-spot”?
Am I looking for long-term or holiday lets?
What sort of rental income can I expect and for how many weeks of the year?
Will I need a managing agent and what are the costs?
Regarding equity release schemes and mortgages always seek independent financial advice from regulated advisers.
This article is written and provided with permission by Robert M.L. Snapper, fully licensed real estate agent in Portugal.