How To Get A Mortgage On A Second Property
Are thinking of buying another property to rent out or use as a second home? Unless you have sufficient cash to buy outright, you’ll need to take out a further mortgage. Follow our guide to ensure the process is as straightforward as possible.
First steps towards a second mortgage
Homeowners are permitted to have more than one mortgage at a time. When applying to buy a second property, you’ll have to prove you can comfortably afford the repayments on both your existing mortgage and the new loan. Your reason for purchasing is crucial as it determines the type of mortgage you need.
Assessing affordability
The lender will scrutinise your finances in minute detail. “To succeed in securing a second home mortgage, individuals must meet affordability criteria and deposit thresholds,” said Richard Wylder, mortgage and equity release consultant at Mortgage Partnership. “This involves a comprehensive inspection of the prospective borrower’s financial stability. Proving sufficient income is important but not the only factor. Existing mortgage commitments, equity in the primary residence, debts and monthly expenses are also considered. A stringent credit check must be conducted and stress tests gauge whether they can handle potential interest rate fluctuations – a crucial step in today’s highly uncertain market.”
Buy a property to rent out
You must apply for a buy-to-let mortgage if you’re purchasing a home to rent out long-term to tenants. These mortgages are generally interest-only, with landlords meeting the monthly instalments out of rent and repaying the capital by selling the property at the end of the term. The minimum deposit is around 25% of the property’s value and the amount you can borrow is based on rental income, which lenders expect to be at least 25% higher than the monthly mortgage repayments.
Secure a second residence
A residential mortgage is required when buying another property that you and your family intend to live in when you’re not in your main home – such as a pied-a-terre or seaside retreat. “The rate for a mortgage to be secured against a second home should be similar to any residential mortgage rate,’ said Adrian Anderson of Anderson Harris. “The lender will consider the applicant’s other mortgages, all other contractual and discretionary outgoings and take into consideration the running costs of two homes. Most deposits are around 25%.”
Invest in a holiday let
When purchasing a property to rent out to holidaymakers for short periods, you’ll need a specialist holiday let mortgage. “The deposit required will depend on the product – including fixed-rate, discounted rate, and flexible rate mortgages – but usually sits at around 25%-35%,” explained Bev Dumbleton, chief operating officer at Sykes Holiday Cottages. “Look for a broker specialising in this area and be prepared for lenders to want reassurance that your property has the potential to make a successful holiday let.”
Check whether a second home can be used as a holiday let
If you have a residential mortgage on your second home, you may be able to rent it out for short periods, but don’t assume you can. “Check this before applying for a mortgage,” advised Adrian Harris. “Some lenders will be comfortable with the property being let out on a short-term basis however they will most likely limit the number of days to 90 per annum.” Switching to a holiday let mortgage is an option if 90 days isn’t enough.
Share a mortgage with a child
Taking out a joint mortgage could be the answer if a child’s strugging to get on the property ladder. “Affordability for joint mortgages would take into account the salaries of all applicants,” explained Peter Mugleston, managing director at Online Mortgage Advisor. “Traditionally lenders use a multiple – most often four to four-and-a-half times – of the applicant’s income. For joint applicants, the multiple is based on the combined total. So, if the combined income of two applicants is £100,000, using a standard income multiple of four-and-a-half times the lender would consider a mortgage of up to £450,000. However, if you don’t have enough disposable income to cover the repayments on a £450,000 mortgage, a lender will not allow you to have one that high. So, further tests are done to review all of the applicants’ total outgoings, not just their gross income.”
There are Stamp Duty implications as not only are you liable for a 3% surcharge above the standard rate – applicable on all second homes – but your child will lose first-time buyer relief (no duty on properties up to £425,000 and discounted up to £625,000).
“It is possible to get a joint-borrower, sole proprietor mortgage, so that the parent takes shared responsibility for the mortgage but isn’t named as an owner,” added Pete Mugleston. “There are important advantages and disadvantages for this type of loan, and I would strongly advise speaking to an experienced mortgage broker to decide whether this is the right choice for your situation.”
Sale and leaseback
Under this scheme – offered at selected developments – you buy a brand new show home then rent it back to the housebuilder for a guaranteed rent. “It’s basically a normal buy-to-let where the lender is comfortable with the property being leased back to the developer/vendor for a period of time (for example, up to three years) to enable them to continue using it as a show home until the development is fully sold,” explained Paul Webb of Fairstone, the recommended broker for Stonebond Properties, which operates the scheme at all current sites. “The buyer will typically need a deposit of at least 25% and affordability is assessed on the open market Assured Shorthold Tenancy rental value.” Once the lease is up, you’ll have to find your own tenants.