Buying a second home? If so, it's essential to think about securing a second mortgage. While similar to the mortgages you get for your primary residence, several factors will influence the options.
Investing in a second property can offer various advantages:
- Assisting a family member in their quest to own a home.
- Generating additional income by turning it into a buy-to-let investment.
- Regardless of your reasons for exploring second home mortgages, assessing whether it fits within your financial means is crucial.
For many individuals, a second home mortgage is the preferred route to buy a second property. You can secure this second mortgage on your current or future property based on your circumstances, property type, and intentions. In this blog, we’ll discuss second home mortgages in detail. So, let’s get started!
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What is a Second Home Mortgage?
A second home mortgage is for individuals who already own a primary residence and want to purchase an additional property. It is commonly used for purposes such as:
- Buying a weekend retreat or a city apartment for midweek stays.
- Owning a holiday home to be used personally or occasionally rented out.
- Helping a family member enter the property market.
The purpose behind your second home mortgage influences the type of mortgage you require. While lenders' criteria for second home mortgages are similar to regular mortgages, the affordability assessments are more rigorous. Since you will have two mortgages, lenders perceive a higher level of risk.
Can You Get a Second Home Mortgage?
Securing a second property mortgage primarily depends on your financial situation. Lenders are more inclined to approve a second property mortgage if you have a substantial disposable income or are nearing the completion of your first mortgage, indicating your ability to handle an additional home loan.
Lenders will evaluate your credit history and ensure you can comfortably manage the repayments for both mortgages.
Similar to a primary mortgage, the lending criteria for a second property mortgage revolves around your income and expenses. However, meeting these criteria is typically more challenging in the case of a second property mortgage.
Exploring Mortgage Options for Your Second Home
Well, no specific mortgage type is exclusively designed for second homes. The mortgage you need will depend on the intended use of your second home.
Mortgages for Holiday Homes
When purchasing a holiday home, the type of mortgage you require depends on your usage intentions.
For personal use without regular renting
If you have no plans to rent out the property, a standard residential mortgage should suffice. The lender will assess your financial situation to ensure you can handle the additional mortgage payments alongside your existing ones. Typically, a larger deposit (at 15% of the property's value) will be required. Interest rates and fees may be higher than your first mortgage. Also, there is additional Stamp Duty applicable to second homes.
For frequent rental purposes
If you plan to frequently rent out your home as a furnished holiday letting when you're not using it, you'll need to explore specialised holiday let mortgages. Some lenders evaluate these applications on a case-by-case basis. You must seek your lender's permission to utilise platforms like Airbnb rentals.
Second Home Mortgages for Buy-to-Let
If you want to buy a second property to use it as a buy-to-let investment, you will need to obtain a buy to let mortgage. Here are some key points to consider:
Buy-to-let mortgage specifics
Buy-to-let mortgages typically have higher interest rates than standard residential mortgages. The minimum deposit requirement is usually 25% of the property's sale value. These mortgages are often structured as interest-only loans tailored for rental investments.
Converting a residential property into a rental
If you buy a second home for yourself, there are important steps. Ask your lender for permission to convert it into a rental property; some may not. Before getting a residential mortgage, check with lenders if you might rent out your second home later.
Converting a previous property to a consumer buy-to-let mortgage
In cases where you purchase a second home to move into but struggle to sell your previous property, consider converting the residential mortgage on your old property to a consumer buy-to-let mortgage. These mortgages are regulated by the Financial Conduct Authority (FCA) as standard residential mortgages, offering specific consumer protections for "accidental landlords" who rent out their property due to necessity rather than choice.
Second Homes as Investment
When considering property investments, there are various opportunities beyond buy-to-let investments. One such option involves finding a property that requires renovation, which can be sold for a profit. In this situation, you have two options to consider:
A bridging loan is a useful option when encountering a property unsuitable for a traditional secured loan or mortgage. For instance, if a property lacks an essential feature like a kitchen, making it ineligible for a mortgage, you can apply for a bridging loan secured against that property. The loan covers installing the necessary facility, making the property eligible for a mortgage and increasing its value. Subsequently, you can sell the property for a profit. Bridging loans can be utilised for specific projects or extensive renovations. These loans have a short-term duration and typically have higher interest rates. They offer flexibility in terms of credit score criteria.
Property development finance is a suitable choice if you purchase a second property for a complete renovation before selling it for profit. These loans are designed for individuals undertaking significant property development projects. You present your renovation plan to the lender, who releases funds at different stages until completion. The loan period usually ranges from 12 to 18 months. Interest rates are relatively high since lenders assess your ability to succeed in the renovation project rather than securing it against existing property. Note that you are typically required to cover 30% to 40% of the renovation costs from your own funds.
Residential Mortgage Limits: Is There a Cap?
When buying property in UK, there is no specific limit on the number of residential mortgages you can have. However, most lenders have restrictions in place. Generally, lenders typically allow a maximum of two residential mortgages. One is for your primary residence, and the second is for a purpose like a holiday home or a home where a family member resides. When applying for a second residential mortgage, you must specify which property will be your main residence.
Also, you must provide a valid reason for seeking a second home mortgage. Some common reasons include holiday homes, divorce situations, or housing for a family member. Lenders want assurance that the funds they lend you will be used for the intended purpose and not for generating rental income.
Continue reading: Second Home Council Tax: How to Minimise Payments and Find Discounts
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