If you currently have a mortgage on your home but want to buy another property, you will likely need a second mortgage.
What is a second home mortgage?
A second home mortgage is a mortgage for buying a second residential property. You will have two mortgages running simultaneously, each secured on a different property. A second home mortgage is not to be confused with remortgaging or a second charge mortgage (more on these later).
A second home mortgage could be for a holiday home, holiday rental or buy to let investment.
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.
If you plan to rent out the property on long-term lets, with six months being the minimum tenancy, then a buy-to-let mortgage is for you. Buy to let lenders typically require a 25% deposit.
If your second mortgage is for a holiday home that only you will use, you may only need a 15-20% deposit.
To get a holiday let mortgage, you will need a deposit of 25%-30%. This is because the lender takes on more risk than with a standard mortgage or buy-to-let where the tenants stay longer term.
Whatever the purpose of your second property, you will access better rates if you have a deposit of 40% or more.
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 will need to pay two mortgages each month. Lenders will usually calculate your affordability by assessing your income and expenditure.
If your second mortgage is for a buy to let property, lenders will need to 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 repayment history on your existing mortgage will form part of your assessment. A flawless payment record will indicate that you are financially stable and a credit-worthy applicant. Lenders 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.
How can I improve my chances of getting a second home mortgage?
- Reduce your outgoings to improve the results of affordability checks
- Have proof that you can afford the repayments on two 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 soley be 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
How much do second mortgages cost?
The interest rate on second mortgages tends to be higher than rates on a standard residential mortgage. Currently, rates are around 2-4% depending on the size of your deposit.
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 remortgage 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 your second home outright.
What about capital gains tax?
If your new property will become your primary residence, make sure that you inform HMRC. Should you come to sell the property later, you will have to pay capital gains tax if it is not your main home.
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 in easy access of London’s shops and nightlife, perfect as a pied-à-terre or buy-to-let investment. Get in touch
with our sales team today.