The types of available mortgage options can vary, depending on your plans for the property. Read on for everything you need to know on second property mortgages.
What Is A Second Home Mortgage?
A second home mortgage is a mortgage for buying a second residential property. Two mortgages run simultaneously, each secured on a different property. A second home mortgage is not to be confused with re-mortgaging or a second charge mortgage (more on these later).
A second house mortgage could be for several types of property purchase, such as:
- Holiday home for yourself
- Holiday rental property
- Buy-to-let investment
- Weekend city bolt-hole
- Buying a home for a family member e.g. child
The type of property purchase will determine the type of mortgage required.
What Type Of Mortgage Will I Need To Buy A Second Home?
The type of mortgage you will need will depend on which of the following scenarios is applicable:
If I Am Buying A Second Home To Live In
If you buy a second home you will be living in yourself, you will require a residential mortgage. This type of mortgage will restrict you from renting out the property, as the mortgage is intended to be used for purchasing a second home or holiday home. If you are considering renting the property, you must take out a buy-to-let mortgage.
If I Am Buying A Second Home To Rent Out
If you are buying a second home to rent out as a holiday home or for a tenant to live in, you will require a buy-to-let or a specialised holiday-let mortgage.
The interest rates for buy-to-let mortgages are usually higher than residential mortgage interest rates. Most landlords choose to take out an interest-only mortgage, which enables them to make more monthly income. However, this means they will not own the property at the end of the mortgage term and will need a plan to pay off the balance.
It is important to ensure you have the right home insurance to cover the property for its use. Your mortgage provider will usually require a home insurance policy for the buildings as a condition of the mortgage. You will need to take out specialist home insurance to cover a holiday let or a landlord insurance policy if you let the property to tenants.
Can I Get A Mortgage For A Second Home?
If you meet the eligibility criteria, you will be approved for a residential or buy-to-let mortgage for a second home.
Even if you already have an existing mortgage, you may still be able to get another residential mortgage. However, you will need to provide evidence to your lender of why you require more than one residential property to live in (i.e. for work purposes if you work away from home) and also make clear which property will be your main residence.
You need to provide this evidence because residential mortgages are generally cheaper than buy-to-let mortgages, so your lender will need to be satisfied that you are not using a residential mortgage for a property you are planning to rent out.
If you are buying the property as an investment to rent out, the buy-to-let mortgage provider will want to check that the rental income you should be able to achieve will be around 125 – 145% of the loan repayments. Residential mortgage providers will also want to be sure that you will be able to afford both mortgages at the same time.
Each provider will have different requirements you must satisfy before they lend to you, so it's important to shop around before you buy a second home.
How Much Deposit Do I Need For A Second Home Mortgage?
The amount of deposit you will need will largely depend on the purpose of your second property. Buy-to-let and holiday-let mortgages will usually require a larger deposit than residential mortgages.
Buy-to-let mortgage providers usually require at least 25% deposit, while a holiday-let mortgage generally requires 30% or more. This is because the lender takes on more risk than with a standard mortgage or buy-to-let mortgages where the tenants stay longer term.
If your second mortgage is for a holiday home that only you will use, you may only need a 15-20% deposit.
Whatever the purpose of your second property, you will access better rates if you have a deposit of 40% or more. A larger deposit will usually give you access to better mortgage deals. Comparing mortgages on a comparison site will show you the difference in interest rates depending on the loan-to-value.
What Are The Interest Rates For Second Home Mortgages?
Second-home mortgages tend to have higher interest rates than standard residential mortgages. Currently, mortgage rates can vary between 5% and 17% depending on the size of your deposit.
Interest rates on an interest-only mortgage can be either fixed rate or variable. Fixed-rate mortgages tend to be higher than variable, giving you the certainty of how much you will pay over the fixed rate term.
Mortgage rates are currently higher than in recent years, so you should compare mortgages and find the best deals available.
If you are buying a second home, you will not be eligible for any first-time buyer mortgage deals or first-time buyer schemes.
What Are The Affordability Checks For A Second Home Mortgage?
You will go through the same affordability checks as with your first mortgage, but lenders will be more cautious as you must pay two monthly mortgages. Lenders will usually calculate your affordability by assessing your income and expenditure, including any personal loans or credit cards you have.
If your second mortgage is for a buy-to-let property, lenders must be convinced that the profit from your rental property will cover at least 125% or even 145% of the mortgage payments before they consider offering you a loan.
The history of mortgage repayments on your existing mortgage will form part of your assessment. A flawless payment record will indicate that you have a good credit score and are a financially stable applicant.
The mortgage broker will also look at the loan to value on your current mortgage to assess your overall liability. If you are in negative equity, you will find it difficult to get a second mortgage.
Using a mortgage calculator will help you understand how much you can borrow for a second home and determine the type of mortgage you require. There are lots of online mortgage calculators that you can use to check whether you meet the required criteria, as well as to find out how much you can borrow.
How Can I Improve My Chances Of Getting A Second Home Mortgage?
Due to the higher risk of lending money to purchase a second home, the mortgage lending criteria are stricter. However, there are some actions you may be able to take that will boost your chance of getting a second home mortgage:
- Reduce your outgoings to improve the results of affordability calculations.
- Have proof that you can afford the mortgage repayments on both mortgages.
- Decide on your plans for your second home. Will you rent it out on long-term or short-term lets, or will it be solely for your use?
- Overpaying on your first mortgage or waiting longer to pay off more of your current mortgage will mean you have less debt.
If you cannot secure a second mortgage, there are still options for buying a second home if you have equity in your current home:
You might be able to re-mortgage to release equity from your existing property, which can be used as a deposit for your second mortgage. You may also get a better deal, which will help with your monthly affordability tests on your second mortgage.
Second Charge Mortgage
A second charge mortgage, also known as a secured loan, allows you to borrow money using your existing home as security. You effectively end up with two mortgages on the same property. This can be useful if you want to release the maximum equity possible, either for a larger deposit or to buy a second property outright.
A bridging loan is a short-term loan, where funds can be raised quickly, and the amount you can borrow is based on your available equity.
Bridging loans are usually used when traditional mortgages are unsuitable. For example, if you are buying a property at auction and need the funds quickly or to bridge the gap if you have your heart set on a specific property but are struggling to sell your property to raise funds.
Bridging loans are secured against the property and can be repaid once the property has been sold or you have been able to secure funds through the traditional mortgage route.
A development loan would be suitable for those who buy an investment property that requires a complete renovation before selling it for a profit. You will need to produce a development plan and show this to your lender, and if accepted, they will give you the loan in stages throughout the development process. You will be expected to have at least 30% of the funds required for the renovation, and the loan term is usually between 12 and 18 months.
What About Capital Gains Tax?
If your new property will become your primary residence, make sure that you inform HMRC. If you come to sell the property later, you must pay capital gains tax if it is not your main home.
How Much Stamp Duty Will I Pay on a Second Home?
If you are buying a second home, you will have to pay an additional 3% Stamp Duty Land Tax (SDLT) on top of the standard rate based on the property's price. When calculating how much income you will make from a property investment, you will have to consider the stamp duty.
For example, if you buy a second home valued at £500,000, you would need to pay the stamp duty of 5%, plus the 3% surcharge for second homes. This would amount to a total stamp duty of £40,000.
Use the SDLT calculator to work out how much stamp duty you will be liable to pay.
We Can Help
If you are considering buying a second property in central London, we can help. We have a large selection of stunning properties within easy access to London's shops and nightlife, perfect as a pied-à-terre or buy-to-let investment. Get in touch with our sales team today.