Pros and Cons of releasing the equity of current property to fund a second house

[rabbitcarrot]

See my friend did this. She & her husband remortgaged their flat (they bought for £135000 in 2014) for current market value £180000 which used to be their main home and rented out, changed it to let to buy mortgage. At the same time they used the extra money 75% of their current market value of their flat minus their outstanding mortgage for £40000, they use that balance for £95000 as deposit to buy a 4 bed detected house for £355000.
Is there any pros and cons for doing this?
I am a bit risk reversed thinking of this.

Do you want to have an investment property to rent? That’s the pro and the con.

It also means that you need to borrow more on the next place. Had your friends sold the flat, they would have had a higher deposit and less mortgage on their house.

Pros: easier to move (no chain), create an investment presumably in an area/ type of property you know and are happy has potential. Low mortgage rates make this affordable at the moment (but maybe not longer term!).

Rent is likely to just cover the mortgage and costs (including tax) on the rented house so the gain doesn’t come until sale.

Cons: pay stamp duty on new home at the second property rate. High risk (can you pay both mortgages if the rental is empty? And what if one of you then loses your job?) Risk of overexposure in current property market when it’s maybe at its peak. Might be ok if you are happy to ride it out for 10 (?) years.

They have two 75% mortgages I think, so on the risky side. Depends on their income, age and job security though.

Did they do this because they couldn’t sell the flat?

@Thneedville

Many thanks for the detailed analysis. Yes, It's very risky in current situation. In next 2-3 years the trend of property market is highly likely downwards.

They rented out their flat for £900 for one year to the middle of June 2021.
Their flat is in a block of new flats, lots people used that area as buy to rent.

The lady's job is one year fixed contract. And she is those sort of person always easily pick up another job. Her husband has three tiny companies as directors.(One is in dormant, two are very tiny almost no business).

She already paid over £20000 this Feb for stamp duty +solicitor fee+mortgage application fee etc. Then kept empty flat for 3 months to rent it out from middle of this June.

I personally is very risky coward about this. I know lots people doing this, High rewards always high risk.

@GrumpyHoonMain

I think they just want to keep it as extra income once they pay off the mortgage when they retire.