The ownership of a second home is something that many people aspire to, and for the majority of them, the best way of making this dream come true is to utilise the equity of their prime residence to finance the additional property.
However good your main property may be, there are lots of reasons you may be considering buying a second home: a city-based pied-à-terre, somewhere to escape to at weekends, a holiday home, a base for a family member to live when at university, or a property investment to rent out, to name just a few.
Can I borrow money against my house to buy another property for myself?
In order to buy an additional property to your main one, you may need a ‘second home’ mortgage or a ‘second charge’ mortgage - these are different types of loans and not to be confused with one another.
Not all lenders offer second home mortgages, and, as all mortgages are, these loans are subject to some strict criteria. You may want to check with the lender of your prime mortgage first, then look at alternatives - there are a number of specialist lenders, for example, who may be more flexible and offer more options than a high street bank or building society.
Whether or not you are going to be living in it, the purchase will be considered one for another home for you by the lender.
What is a second charge mortgage?
‘Second charge’ mortgages, or ‘second mortgages’ as they are often known, are a way of raising money on your home in the form of a second loan, an alternative to remortgaging and personal loans when it comes to raising more cash. They are only available to homeowners and subject to certain conditions, with a minimum loan usually of £10,000.
With two loans on your home, the first mortgage takes precedence over the second when it comes to repayment.
How does a second charge mortgage on a property work?
Second charge mortgages are secured by your home and based on its value and your existing mortgage. The value of your home less the outstanding amount of your existing mortgage is known as your ‘equity’.
So, if your property has a market value of £400,000 and you have £250,000 left to pay on your primary mortgage, you can theoretically borrow up to the equity - in this case, £150,000 (37.5% of the full value) - for the second charge. As property values rise and how much you owe on the main mortgage falls, your equity increases.
Just like your primary (or ‘first charge’) mortgage, and will also need repaying at the same time every month.
Second charge mortgages are usually offered to represent 65% to 75% of the purchase price, so you’ll need to be able to provide a substantial deposit too.
What are second charge mortgage buy-to-let?
These mortgages are provided to purchase homes which are let out for other people to rent and the second mortgage on this kind of property is the same in principle as second charge mortgages on homes for the borrower to live in. In addition, the lender will consider the local rental market to determine if it could be risky to find a tenant and the borrower therefore have a reduced income and not be able to meet the monthly mortgage repayment.
Can I use my buy-to-let property equity release to purchase another property?
Yes you can, and this is a common strategy for people who want to build up a property ‘empire’. The principles are the same: the property will be valued and the potential loan amount calculated from that and how much you owe on the existing mortgage.
Process of buying a second property using equity
Buying a second property is a popular option, and in buoyant property markets, the financial benefits of the rise of the value of a second home will almost certainly far outweigh the investment potential of, say, a savings account or shares.
The first thing to do when considering a second home is to find out how much you can borrow. Subtracting what you owe on your prime mortgage from a valuation of your home will give you an idea of the amount that may be available, but check with a mortgage adviser to find out precisely the most you can expect to borrow. This will allow you to determine the budget to consider for the new property.
The purchase process itself will be the same as with any other home buying, in terms of surveying and legal processes, and the need to have a mortgage/deposit in place, but bear in mind that second homes and buy-to-let properties are all subject to a 3% surcharge on stamp duty.
Example
The second home you are buying is priced £200,000.
If it was a main residence, stamp duty at 2% would apply for the costs above the low threshold of £125,000. In this case, £200,000 - £125,000 = £75,000 x 2% = £1,500
As a second home or buy-to-let property, the stamp duty would be charged at 5%. In this case, £200,000 - £125,000 = £75,000 x 5% = £7,500
How to get a second charge mortgage
The first step is to assess how much your property is worth and confirm the equity you have on it.
The next consideration is your eligibility for the loan, which is now subject to some strict regulations. Your lender will apply the same affordability checks as they would on a first mortgage, to confirm that you are in a financial position where you can afford to pay back the loan.
Factors that are assessed are:
- Your income, which you will have to provide proof of
- Your regular outgoings, to see if you can comfortably afford the extra expense of a second monthly mortgage repayment
- Your overall credit rating
Is getting a second charge mortgage a good option?
There are pros and cons of getting a second charge mortgage, depending on your circumstances.
Pros
- Remortgaging, that is, having a larger prime mortgage, might mean you’ll lose a very competitive ‘lifetime’ interest rate, so a second mortgage will leave the prime mortgage as it is.
- Remortgaging may also mean you are forced to change an interest-only loan into a repayment loan, which will increase monthly payments as you have to contribute to paying off the capital as well as the interest.
- If you are considered too old to remortgage by your lender, or your financial position not good enough for them to lend more to you, the second charge option with another lender may be more available to you.
- If you have a poor credit history, the interest rate on a second mortgage may be cheaper than other types of loans you may qualify for.
- The loan terms may be very flexible in terms of repayment period.
- Your current mortgage may have a substantial early repayment charge which you’ll have to hand over if you effectively pay it off the original one to a larger one by remortgaging, effectively redeeming the original loan and starting a new one.
Cons
- You’ll have two mortgages to pay every month
- High deposits for the property are usually required, a minimum of 25%
- Older buyers may find the maximum age allowed at the end of the mortgage terms limits the period of their mortgage, increasing monthly repayment.
- The interest rate of a second mortgage will almost certainly be higher than the one you’ll get when remortgaging, and even taking into account any early repayment charge. Some prime mortgages don’t charge for early repayment, so a separate second mortgage is very likely to be the more expensive option.
- If you fail to pay the second mortgage, your prime property will be at risk.