Do you have plans to buy a second home? If so, a second mortgage is probably something you’ll need to think about. These mortgages don’t differ greatly from those you get for your main residence, but several factors will determine the options you have.
A second property can potentially be a good investment for various reasons:
- Perhaps you want to give a relative somewhere to live
- Maybe you need somewhere your family can go to get away from your busy lives
- It could supplement your household income as a buy-to-let / holiday let investment
Whatever reasons you have for looking at second home mortgages, you need to establish whether it is truly something you can afford.
A second mortgage is the most common method for people to acquire a second property since not everyone has a large sum of cash available. The second mortgage can be taken out on your current property, or on the one you are looking to buy. It will depend on your situation, the kind of property you are buying, and your intentions for that property.
Prospective mortgage lenders will look very closely at your finances when you approach them looking for second home mortgages. At Think Plutus, we can help you with all the considerations you need to cover.
What are second home mortgages?
The term ‘second home mortgages’ doesn’t refer to a specific product. Essentially, to purchase a second home you will be required to secure a second residential mortgage. If you intend to buy a second property to rent it out, the mortgage you need will be a little different.
Let’s explore some typical scenarios where clients approach us looking for a second mortgage.
Second home mortgages for holiday homes
A holiday home is a fantastic thing to enjoy with your family. If you have no intentions of renting the home out regularly, an ordinary residential mortgage should be all you need for that second property. The lender you approach will scrutinise your finances to ensure you can afford to take on new mortgage payments in addition to your existing ones. In most cases, this will mean a larger deposit is required – typically, at least 15% of the new property’s value. Interest rates and fees may also be higher than you have with your first mortgage, though this isn’t always true. You should also be aware of the additional Stamp Duty that must be paid on second homes.
If you plan to frequently rent out your holiday home when you are not using it, you will need to seek a specialist holiday home mortgage. Some lenders will consider these applications on a case-by-case basis, and if you plan to use Airbnb for rentals then you must seek your lender’s permission.
Second home mortgages for buy-to-let investments
If your goal for a second property purchase is to rent it to tenants, you will need to secure a buy-to-let mortgage. The rates on this mortgage type are usually higher, and the minimum deposit is 25% of the sale value. However, these mortgages can be interest-only instead of repayment-based, and designed with buy-to-let in mind.
You will find that if you initially buy a second home to use as a residence, but then decide to rent it out, there will be some hurdles to overcome. You must seek permission to do so from your lender, and there may be an admin fee to pay. Different lenders approach this situation in different ways, and there will be some that will not grant you permission. If you feel there is a possibility that you may want to rent your second home out in future, you should check with lenders before getting your residential mortgage.
Another common occurrence us that someone buys a second home to move into, but then struggles to find a buyer for the previous property. In this case, you could consider converting your residential mortgage on your current property to a consumer buy-to-let mortgage, a scenario known as Let to Buy. The FCA regulates these mortgage types as standard residential mortgages, and come with consumer protections specific to ‘accidental landlords’ who find themselves letting out a home because they have to, rather than as a business choice.
These kinds of second home mortgages are different from standard residential ones. The initial deposits are usually higher, as are the interest rates, so you seek mortgage advice to assess whether your finances can cover the expenses.
Second homes as investments
A second property can be a great investment opportunity, and we have already established that buy-to-let investments require a buy-to-let mortgage. Of course, there are other investment ideas when it comes to property. You may find a property that needs renovation, which you could quickly sell on for a profit. There are 2 options available to you in this situation:
1. A Bridging loan
Bridging loans are a great resource because they can be secured against land or property that isn’t suited to a secured loan or mortgage. For example, you may find a property that doesn’t qualify for a mortgage because it lacks an essential facility, like a kitchen. You could apply for a bridging loan that is secured against this property, covering the cost of installing that kitchen and thus making the property mortgageable and simultaneously boosting its value. It could then be sold for a profit. Bridging loans can be used to pay for specific projects like this, or for wholesale renovations. They are short-term loans, and the interest rates are relatively high, so there is flexibility with regards to credit score criteria.
2. A development loan
If you plan to purchase a second property in order to renovate it entirely before selling it for profit, property development finance could be a good option. These loans are designed for people aiming to undertake extensive property development projects. You will need to present your plan to a lender, who will then release funds at various stages of the renovation process until it is complete. The loan period typically spans 12-18 months. The interest rates are relatively high since lenders are being asked to loan on the basis of your ability to succeed with your renovation project, rather than securing it against a project that already exists. Note that you will need to cover between 30% and 40% of the renovation costs from your own pocket.
Is there a limit on the number of residential mortgages you can have?
Technically speaking, there is no limit to the number of residential mortgages you can have in the UK. However, lenders will want to check whether people are using them for properties which they then rent out. This is why most lenders will not permit more than 2 residential mortgages: one for your primary residence, and one to be used as a holiday home or a home in which a family member lives. When you apply for second mortgages for residential purposes, you will need to declare which is to be your main residence.
You will also be required to state a valid reason for wanting to take out a second home mortgage. These can include:
- Holiday homes
- Divorce
- A home for a family member
Lenders need to be convinced that the money they lend you will be used for the stated purpose. They don’t want to approve a second residential mortgage for a property that goes on to be used to earn rental income.
Joint second home mortgages
The majority of mortgage products can be granted for more than one person. You may want to apply jointly with the person you will be sharing your holiday home with, or you may have a business partner for an investment property. In any case, the number of people involved shouldn’t change the type of mortgage you apply for. All that will happen is that the mortgage will become a joint one, even with a bridging or development loan.
Second home mortgages FAQs
Will I qualify for a second home mortgage?
If you can prove that you can meet the minimum deposit, afford monthly repayments and have a good track record, you should be eligible to apply. Certain lenders have stricter criteria when it comes to second home mortgages. The specialist mortgage advisers at Think Plutus can help you find lenders with experience of clients like yourself.
What second home mortgage requirements are there?
The qualifying requirements for second home mortgages are not the same as ordinary residential mortgages. This is because the financial risk to the lender is greater. When you make an application for a second home mortgage, lenders will assess the amount your current mortgage costs each month to identify whether a second mortgage is something you can afford. With second home mortgages, you can expect to pay a minimum deposit of 15% and also higher interest rates.
What sort of deposit will I need for a second home mortgage?
Generally speaking, the minimum deposit asked for a second mortgage is 15%. If you are able to afford an even larger deposit, it will be easier for you to find a mortgage and you will probably get better rates. You might even be able to get the mortgage on an interest-only basis.
Can seniors apply for a second mortgage?
There isn’t a formal age limit for applying for second mortgages, but some lenders have their own criteria. With these lenders, even applicants who are below the maximum age may have their age taken into consideration if they are close to the maximum. For example, if you’re 65 and apply for a second home mortgage, you may be required to pay off the mortgage in just 10 years, rather than 25-30 years. For interest-only mortgages, this shouldn’t be a problem, but a short term on a repayment mortgage could mean the monthly costs are high.
Can a second property be bought by remortgaging my current one?
If you have sufficient equity in your current home, it could be prudent to remortgage in order to buy a second property. Of course, lenders will still need to ensure the higher remortgage payments are something you can afford. Remember, if you fail to make mortgage payments on your main residence, the lender may be forced to repossess that property.
Is the Stamp Duty higher on second homes?
In England and Wales, purchasing a second home as an investment or holiday home incurs the standard Stamp Duty costs PLUS an additional 3%. This is because second residential properties come with a Stamp Duty surcharge. Note that a Stamp Duty refund is available if your second home becomes your primary residence AND you sell/give away your original property within 3 years of the purchase of that second home.
Contact Think Plutus
Applying for second home mortgages can be complicated, and there is always lots to take into account. It can be helpful to have expertise in your corner, particularly from advisers who have whole-of-market access to the full range of mortgage products. Contact Think Plutus today to get the specialist advice you need to successfully apply for a second home mortgage and secure your second property.