What is a second home mortgage?

A second home mortgage, as the name suggests, allows you to purchase a second home for your own use – such as a holiday home, a residence that's closer to work during the week, or a home for a family member. If you're looking for a property to rent out, you'll need a buy-to-let mortgage. 

Second home mortgages work in a similar way to first mortgages, only with stricter affordability checks. That's because paying for two mortgages simultaneously could add significant financial strain. 

So, if you want to get a mortgage for a second home, you need to make sure your finances are in good order. For instance, if you're nearing the end of making repayments on your first mortgage, you might find taking on a second loan more manageable.

You might find it helpful to use a second home mortgage calculator to see how much you could borrow and what the repayments are likely to be.

Distinguishing second home mortgages

It's important you understand the difference between a second home mortgage and other financial products such as a second charge mortgage and a remortgage:

• Remortgage: Involves changing the mortgage deal on your current property rather than buying an additional one

• Second charge mortgage: While sometimes confusingly referred to as a 'second mortgage', a second charge mortgage is secured loan taken out on your existing property to release equity rather than a separate mortgage for a new home. Crucially, a second charge mortgage is secured against your current home.

What affects second home mortgage approval?

Most lenders generally impose stricter criteria for second home mortgages compared to first mortgages:

• More stringent affordability checks. You will go through all the same financial assessments as usual, but the mortgage provider will be extra cautious about lending to you, as you’ll be making two mortgage repayments every month instead of one. You may wish to wait until you’ve repaid more of your current mortgage or paid it off completely, as this could help you get a more competitive deal on a second home mortgage.

• Larger deposit. You'll usually need a deposit of at least 15% of the property's value and, in some cases, even more.

• Higher interest rates. Second home mortgage deals are likely to come with higher interest rates than standard

  mortgages. That means borrowing the same amount is likely to cost you more than with your first mortgage.

Before you apply, it's a good idea to find out whether your credit score has changed since taking out your first mortgage. You can do this by getting your credit reports from the three credit reference agencies – Experian, Equifax and TransUnion – which you can do for free. Credit issues could reduce your chances of being approved for a second home mortgage.

Other considerations when buying a second property with a mortgage

There are several important factors to keep in mind when deciding if buying a second home is right for you:

• Will you want to rent out the property? If you decide to rent out the property in the future, you must get permission from your lender. Always check their policy in advance to make sure you understand any restrictions, requirements or additional costs involved

• Will you change your main residence? If your second property becomes your main home, you should inform HM Revenue and Customs (HMRC) within two years. This is to ensure you avoid paying Capital Gains Tax (CGT) on it if you sell the property later. CGT is a tax that applies when you sell a property that's not your main home, so would still have to pay it on your original home if you sold it.

• Are you planning to buy a property abroad? You may be planning to get a mortgage to buy a second property abroad to use as a holiday home. However, it's a good idea to speak to a broker specialising in overseas mortgages, as most UK lenders don’t provide mortgages for properties outside the UK.

• Are you aware of your tax liabilities? You may incur additional charges when you buy a second property. For example, buying a second home generally incurs a higher rate of Stamp Duty Land Tax (5% on top of the standard rates in England & Northern Ireland). Use our stamp duty calculator to find out how much stamp duty you'll need to pay on your second home.

• Have you considered the extra costs? Bear in mind that you'll face all the usual costs of buying a property, including legal fees, a property valuation and product fees. Plus, you'll have two sets of bills, Council Tax (which may be charged at a premium for your second home) and maintenance costs to think about.

Choosing your second home mortgage type

As with any other mortgage, you’ll need to work out if you want a fixed or variable-rate deal.

• Fixed rate mortgages offer predictable monthly payments, as the interest rate remains the same for a set period.

• Variable rate mortgages may offer a lower initial rate but, as rates can fluctuate, this could potentially lead to higher repayments if rates rise.

Always consider the total cost over the deal period when comparing second home mortgages, including any mortgage fees. For example, a mortgage with no fees could have a higher interest rate which means you could end up paying more than if you took out a deal with fees.

How can I improve my chances of getting a second home mortgage?

• Be realistic about your budget. If your current lifestyle just allows you to live within your means and you only have a small portion of your income left over each month, you're unlikely to be able to afford a second mortgage.

• Reduce your spending. Lenders assess your current lifestyle and spending habits. So save money on bills where you can, plus cut down subscriptions and other non-essential spending well before applying (at least three months).

• Check your credit score. Check your credit report to ensure it's error-free and up to date. You might also be able to identify some ways to improve your score.

• Get your paperwork ready. Gather all necessary documents to demonstrate your income can comfortably cover two mortgage repayments.

• Consider early repayment. If financially feasable, you may wish to pay off more of your current mortgage or settle it completely.

• Compare mortgage deals. A mortgage broker can help you to compare deals from across a wide range of lenders to find the right option for you. They'll assess your individual circumstances, guide you through your options and recommend suitable lenders.

Read more …

• Home Buying & Moving Costs |The Facts of Buying a Home

• Getting a mortgage when you're older

• Rent to Buy | What is it and how can it help you?

• First Time Home Buyer Mortgage