Second home mortgage rules
You may want to take out a second property mortgage for several reasons, and whatever they may be, there are some rules you need to keep to get and keep your mortgage successfully.
Every mortgage provider is different and will have its own second home mortgage rules, so be sure to do enough research and find a lender and broker that works for you and suits your requirements.
If you want to know the basic rules for getting a second mortgage, you have come to the right place – at Loan Corp we can provide you with expert advice to get your mortgage process started.
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A second home mortgage: what is it?
If you are looking at buying a second home, then a second residential mortgage is just what you need for that property. A home mortgage differs from a buy-to-let property and suits those looking to buy a second home for personal use.
This means getting the house as a holiday home, getting a place closer to work so that the daily commute is not that long, or getting a home for a family member. You will need a buy-to-let mortgage to rent the second home.
Essentially, a second mortgage works just like a first mortgage does. However, the mortgage affordability checks are much stricter as a second mortgage generally adds much more financial strain.
Therefore, you first need to be sure that your finances are in order before applying for and taking out a second mortgage and seeing if you qualify.
The rates on a second mortgage are much higher than those for a first mortgage, so be sure you are fully aware of the repayments and how much you can borrow.
Many helpful lenders can make your second mortgage possible, and we highly recommend HSBC, Halifax, Barclays, Natwest, and Santander as our top five.
Some rules to note:
According to official figures, about three-quarters of a million English households had a second household and about half a million in the United Kingdom. If you are considering investing in a second home, you have come to the right place.
There are a few things you need to be aware of before making a final decision:
- When investing in a second property, you will need at least a 15% deposit to take out the mortgage and a 25% deposit if you use it as a rental property.
- A second or residential mortgage will be subject to a stamp duty surcharge. This surcharge will be around 3% and must be paid with the general stamp duty tax rate. Charges are a lot higher on your second property.
- If you want to rent the property and earn a rental income, you must take out a buy-to-let mortgage.
- If you currently have an existing mortgage, you should expect stringent affordability requirements that you will need to meet to take out another loan.
- There will be several maintenance costs once you have bought the home.
- The mortgage rates on a second property are much higher.
- If you decide to sell the second home at a later stage and get a lot more for it than you originally paid, you will likely get a capital gains tax bill.
- You will need to make monthly repayments.
Deposit:
All mortgage lenders are different, but when you take out a second home mortgage, most of them will require a 15% deposit at a minimum. If your current income is insufficient to cover the amount you would like to borrow, you will likely need to put down more, especially if you are struggling to pay your first mortgage.
Due to the interest rates being so much higher on a second mortgage, so you could be borrowing the same amount as you did for your first mortgage, but all of the other costs will make the price skyrocket.
Your current mortgage repayments will be assessed with your other financials when you apply for the second mortgage. If you cannot afford to repay your second mortgage on top of your existing mortgage, you will not be approved.
You need to make sure you have enough funds to buy a second property, as the lender you choose to go through will make a decision based on your finances and will want you to have equity in your second property so that they feel more comfortable taking this risk with you.
When it comes to the deposit, remember the following:
- You will require a deposit of 15%
- The deposit will be around 25% for the second property mortgage if you plan on renting that property out.
- If you want to have a holiday let mortgage, then expect to pay a deposit of 30%
Monthly bills
When taking out a second home mortgage, you must keep track of a new set of bills. Your bills may include the following:
- Council tax
- Insurance
- Decorating costs
- Energy
- Maintenance costs
You will now have two homes to care for and maintain, both of which come with monthly bills and the occasional problem.
Stamp duty
When you buy a buy-to-let property or a holiday home, the stamp duty becomes much more expensive than it is for your primary residence or first home.
You must pay a 3% stamp duty surcharge for all additional properties. This surcharge must be paid on top of your original stamp duty tax.
Buy-to-let mortgage
You will need to give reasoning and explain why you want/need a second home and its purpose when you first apply for the mortgage.
If you plan on renting it out, you must get a holiday home mortgage or a buy-to-let mortgage.
To get this, you will need the following:
- A great credit score
- A much larger deposit
- The spirit and enthusiasm to go through the process of buying a house again
Capital gains tax
You must pay capital gains tax when you sell your second property. The amount you need to pay will be calculated depending on how much profit you make from the sale and your personal circumstances.
You will be required to pay tax on the chargeable gain. This includes your gain minus the private residence relief for which you may be eligible. You can get relief on the number of years you lived in that particular home and on the last nine months that you legally owned the property.
CGT, Capital gains tax, is not needed for your primary residence, so you must decide which of your two homes will be seen as your primary and official residence.
The two brackets for CGT are as follows:
- Basic taxpayers pay 18% in Capital Gains Tax
- Higher-rate taxpayers pay 28% in Capital Gains Tax
Mortgage size
How much mortgage you can borrow will be determined by affordability and income. Most lenders tend to cap their lending at around 4x of your earnings.
Some lenders may go as far as 6x, but this is quite rare and is only offered if you have particular personal and financial circumstances.
Any mortgage provider’s rules and restrictions on a second mortgage are relatively strict.
Distance between your first and second property
The distance between your second property and your current home is assessed on a lender-by-lender basis and plays a significant role in your approval. Most lenders are not eager to help with overseas homes as complex foreign property markets and currency fluctuations are seen as more of a risk.
Lenders are more likely to approve if they see how the property benefits the applicant. Some lenders may ask you to change your mortgage to a buy-to-let mortgage, while others will be happy to let the mortgage continue if you let them know.
If you want to change how you use your property, always update your mortgage broker and let them know. Otherwise, it may be seen as a breach of contract.
Different property rules
Different types of properties have different rules and requirements. Let’s look at the following:
Rental property
If you purchase a property to rent it out, always assess the location and condition of the property to ensure that it is a sound investment property.
The total amount you earn in rental income must exceed the agreed-upon percentage of your monthly mortgage repayments.
Specific lenders may limit the number of buy-to-let mortgages or the amount they will lend you to purchase a rental property.
Holiday home
The mortgage lender will require proof that you use one of your properties as your main home, and you will need to give details on the purpose of your second property.
Once you have done this, you can apply for a second residential mortgage. You will not be able to rent the place out if you get a mortgage for a holiday house.
Affordability criteria for second-home mortgages
You will find that meeting the affordability criteria for a second home loan is much harder than it is for your first home. Since you are already paying a mortgage on another home, lenders will see you as a high risk.
It is always best to compare mortgage deals, but few lenders offer second mortgages, so your options are limited. Every lender will consider your current mortgage, everything from the monthly payments, deposit, and tax.
Final thoughts on second home mortgage rules:
Some rules must be adhered to when applying for and taking out a second mortgage. And as long as you abide by all of these rules, getting a second mortgage can be relatively straightforward.
As long as you stay on top of your existing mortgage repayments and have a good reason for a second home, then there’s no reason why your request should not be approved.
Contact us below for all the latest rules and regulations on owning a second home with a mortgage. We can get you approved for a mortgage in just 24 hours, start online below: