There are a variety of reasons why a homeowner might want to buy a second property. The two most common reasons are to purchase a holiday home in another part of the country (or even abroad) and to buy a second property as an investment to let out for rental income. Depending on your circumstances, there are a number of ways to raise funds to purchase a second home.
Second home mortgage
In this scenario, you keep your existing mortgage on your current home, but take out a second mortgage – either with the same lender or a new lender – secured against the new property. A second home mortgage is in most ways exactly the same as a standard residential mortgage. However, because there is a higher risk associated with the lending – because the borrower will have to keep up repayments on two separate mortgages – the application criteria in terms of calculating affordability are likely to be tougher, and you may also be expected to put down a bigger deposit than on a main home purchase. Interest rates on second mortgages are also usually higher.
If you have sufficient equity in your main home, then an alternative option may be to remortgage to a new lender while borrowing additional money to fund the purchase of the second home. In this scenario, the loans for the purchase of both your homes are effectively secured on your main residence, and none of the borrowing is actually secured against the second home. Remortgaging can be a good option if you have plenty of equity available in your main residence and, depending on interest rates, it can be a less expensive option in the long run compared to taking out a second home mortgage.
For homeowners aged 55 or over, equity release schemes are a way of freeing up the cash value of your home, whether you have an existing mortgage or own your home mortgage-free. People use equity release schemes for a wide range of reasons, including to pay for home improvements, a vehicle purchase, a holiday, family weddings and so on – but you can also use equity release to fund the purchase of a second home. There are a variety of equity release schemes available, and you can learn more here.
If you are buying a second home for investment purposes to let out for rental income – even if only for part of the year – then you will need to apply for a buy-to-let mortgage. This is a type of mortgage specifically designed for rental properties, and as such the terms and conditions differ to a standard residential mortgage. The application process is also different – while the lender may look at other sources of income as an element of assessing affordability, the main criteria they will take into account is the projected rental income on the property. Different criteria can apply depending on the type of the property, whether it is part of a larger property portfolio, and whether you are a basic-rate or higher-rate taxpayer, but as a general rule the lender will be looking for the rental income to exceed the projected mortgage repayments by a certain ratio, for example 125%.
Deposit requirements and interest rates for second home mortgages
If you are taking out a mortgage to buy a second home, you will probably need to put down a larger deposit than on a main house purchase. While first home mortgages are available to borrowers with a deposit as low as 5% of the property value, it’s typical for second home mortgages to require a deposit of at least 25%, although this can vary from lender to lender. Similarly, interest rates are normally higher on second home mortgages, although it is still possible to shop around to find a good deal.
How Just Mortgage Brokers can help
At Just Mortgage Brokers, we have years of experience in helping people buy property – and that includes both second homes and buy-to-let properties. Contact us today to discuss what is likely to be the right type of mortgage for your needs, and how we can help you find the lender and mortgage deal that’s right for you.