How to finance a second home

June 2020
How to finance a second home

The UK is ideal for owning multiple properties. You might dream of having a country pad to escape to on weekends and for holidays or a seaside home for the summer. You might even want to buy an island and enjoy holidays away from the modern world!

 

Unless you’re cash-rich, your best option to finance a second home is using a mortgage.

 

Taking out a second mortgage is not the same as remortgaging or a second charge mortgage. A second mortgage should only be used to buy an additional property.

 

 

Financing a second home using a mortgage

Even in the post-credit crush world, there are still plenty of mortgage options available. Depending on what you intend to use the property for, you can secure either a residential or commercial mortgage from a high street bank, building society or a smaller lender.

 

Your best option probably isn’t you current street bank. So you’ll want to talk with a whole of market mortgage broker such as London & Country, who will be able to search hundreds of products, most of which aren’t available directly.

 

Don’t use the mortgage broker that was recommended by the estate agent. Typically the agent will receive a commission for the recommendation. Also, it’s worth avoiding brokers who are tied to one or only a few lenders as you probably won’t get the best deal.

 

While the number of second home mortgages may be a fraction of what was available just a few years ago, a wide range of options still exist. These include equity release products and holiday lets mortgages.

 

 

Saving a deposit

To finance a second home, you’ll first need to have a deposit. Unlike your primary residence, where you might have put down 10%, your lender will want a substantially larger deposit.

 

Usually, your lender will demand a deposit between 25% and 40% depending on the property, it’s location and condition. Some lenders will insist on cash, while others may lend based on your home’s current equity, so long as you’ve built up a substantial amount over the years.

 

As is the case with any mortgage, the larger your deposit, the better terms and interest rate you’ll be offered. So you may want to consider raising more cash and starting with a larger deposit.

 

 

 

 

 

Applying for finance

As with applying for any loan, when you’re looking to finance a second home, the lender will want to evaluate your financial situation.

 

They’ll want to know key details about your job including time employed and your income. You’ll also be required to explain how you fund your lifestyle and provide bank statements to back this up.

 

The lender is likely to run a credit check to ensure you have a clean financial history and have proven you can borrow responsibly. It worth checking your credit report and trying to correct it before applying for mortgage.

 

By building a complete financial picture of you, they can fully assess if your current income and outgoings can also support borrowing this additional money.

 

 

Is it harder to finance a second home?

It is more difficult to obtain an additional mortgage as your putting further stress on your finances. In some cases, the lender might deem that borrowing this additional money will exceed your ability to repay while maintaining your current lifestyle and will deny your application.

 

Even if you can pass these stress tests, the lender will lower their risk further by offering a higher starting rate of interest than you might expect to be paying.

 

As well as higher financing costs, you might see the cost of insuring your second home is also higher. Like the lender, the insurance company might deem you a greater risk and so increase the premium.

 

 

 

 

Can I reduce the finance cost by letting the property?

Depending on the lender and the type of loan you might be able to let the property on a short term basis. You may be able to use this income to repay the mortgage. This might lower your perceived risk and result in a slightly better interest rate.

 

However, your lender may impose certain conditions on your ability to let the property making it hard to generate an income. You might be required to apply for a different product as your use is different from the initial one.

 

If you plan to let your second home, the lender will want to see proof that there is a local demand for your intended use. For example, you may buy a seaside cottage which is ideal for renting out in the summer to holiday makers.

 

It’s also worth bearing in mind that failure to disclose that you will be renting your property out may put you in breach of the mortgage conditions.

 

 

Will the lender send a valuer out?

Any potential lender will want to lower their risk. One of the main ways they use is to send out a valuer to value each property before they agree make an offer.

 

Just like with a normal mortgage, the lender will ideally want the figured you’ve agreed with the seller to be in the same range as the open market value. However, if you’ve agreed a higher price than the current market value, your mortgage application will be declined.

 

 

 

 

Do I need to budget for fees?

You will likely need to pay a mortgage arrangement fee to your broker. Also, you’ll need to pay conveyancing costs and Stamp Duty, which carries an addition 3% levy on additional property.

 

Not to mention you will need to have some money set aside to furnish and insure the new property.

 

 

Will I have to pay Capital Gains Tax (CGT)?

Unless you intend to make this second property your primary residence (and inform HMRC), you’ll likely have to pay CGT when you sell the property on top of Stamp Duty and other such fees.

 

 

What are my options if I can’t find a suitable mortgage?

The second mortgage market has fewer products available than if you were taking out a mortgage on your primary home. So you might struggle to finance a second home with a suitable mortgage deal.

 

All hope is not lost as you still some options. You could look at remortgaging your current property and using the money you save to boost your deposit. You could downsize your current home and release cash that way which could beef up your second home fund.

 

You could wait a few years and reduce your current outstanding mortgage amount. By lowering your overall debt, you become more attractive to lenders and so, you should be able to find a better financing package.

 

If your in doubt about how to finance a second home, either talk to a mortgage broker or Independent Financial Adviser (IFA).