Thinking of branching out to buy a second home? Unless you have the funds to buy a property outright, this will involve applying for a second mortgage.
Having two homes means two mortgages with separate regular payments - does this make sense for your circumstances? Our guide aims to help you understand the process.
Taking out a second mortgage to buy a second home
In this instance, taking out a second mortgage means buying a second home, not remortgaging what you currently have or releasing equity for a second-charge mortgage on a single property.
To take out a second mortgage to buy an additional property, you must be in a comfortable position with your existing commitments. For instance, if you live wage to wage, have credit card payments, standing orders and bills on top of your mortgage, applying for another might not be a great idea.
To consider taking out a second mortgage, you will, of course, need to meet the requirements of a lender. Being able to handle your outgoings comfortably and having disposable income to hand is essential to both fulfil what the lender is looking for and ensure you’re not living beyond your means.
What is a second home?
For tax reasons, a second home is defined as a property that’s not your primary residence. However, you may intend to occupy this home for part of the year.
There are many reasons some choose to buy a second home. For instance, you might live in the countryside but have a second property in the city for work purposes. Alternatively, a second home often works for people as a holiday or weekend home.
Some choose to put their savings into a second home as an investment – sometimes this is with retirement or inheritance in mind.
Can I rent out a second home?
The rental of your second home is a viable, and sometimes sensible, option - especially if you wish to get help with covering mortgage payments.
How you choose to rent out your property will depend on the amount of use you wish to get out of it personally, but there are a few options when it comes to renting:
- Long-term lets – With the appropriate buy-to-let product in place on your second home, a long-term let could help you earn money from your investment property. Also, with the right tenant, you can ensure the house is kept in good condition for the future.
- Holiday rentals – If your second home is in a coastal location, or even abroad, you might find that it’s ideally placed to become a holiday rental. You can then choose when you’d like to use it and take bookings during other times.
- Holiday home rules – Currently, Britons can reside in their holiday home in Europe for up to 180 days without obtaining a visa, however, the 180-day rule is subject to change thanks to Brexit. If you have a holiday home abroad, renting it out for a period of time may provide the financial help you need to make the second home more affordable.
- Covering costs – The money you earn from long-term lets and holiday rentals can go a long way towards repayments on your second mortgage.
Choosing the right second mortgage
Buying a second property and committing to a second mortgage is a big decision to make financially, so it’s important to understand the ins and outs of the situation.
What kind of deposit will I need for a second home?
While there are often mortgage products starting from 5% deposit for first-time buyers, the deposits required are likely to be higher for a second mortgage. Many lenders will require a minimum deposit of at least 25% for a second home.
Are mortgage rates higher for second homes?
Yes, rates are often higher for second mortgages, so you’ll need to work out whether you can afford an additional payment that will exceed your current one.
What might limit my chances of getting a second mortgage?
There are some key factors to consider and a few things that have the potential to limit your chances of being able to buy a second home, such as:
- A decreased credit score – missed payments or additional debt such as hire purchases or credit cards will affect this rating.
- Reduced income – if you don’t have enough money coming in for a lender to consider two regular mortgage payments affordable, you’re unlikely to be approved.
- Your current mortgage – lenders will consider how much you’ve paid off on your first mortgage.
Will I have a range of second home mortgage products to choose from?
You will likely have to do a lot of shopping around for a second home mortgage as fewer lenders offer this option. Finding something that fits your circumstances might take a lot of hard work, but there are things you can do to improve your chances, including:
- Be patient and pay off more of your current mortgage
- Improve your credit rating
- Reassess your income and outgoings
- Rent out your second home to cover any shortfall in affordability
Can I have mortgages with more than one lender?
Yes, it’s possible to have a mortgage with a different lender for your second mortgage. However, your current lender has all your details and a firm understanding of your financial situation, including what you can afford to pay so will be worth approaching first.
A second mortgage is a big financial undertaking that can affect your credit score. If you can’t find an affordable deal, it’s worth waiting.
You might pay off a little more on your first mortgage, or even investigate if it’s worth remortgaging your current property to a potentially lower repayment. This might help if you decide to try again further down the line.
Remember that borrowing more on your mortgage could put your home at risk, so these decisions should be carefully thought out.
Hopefully, this guide has given you a better understanding of second mortgages. If you’re looking to get your finances in order and better manage your repayments, then get in touch with Norton today.