Alternatives to a Second Mortgage
Not everyone is in the position of being able to obtain a second mortgage, or it may be that a second mortgage is not considered desirable in certain circumstances. This does not mean that the purchase of a second home is impossible, because there are alternatives that may provide a solution.
One of the most common alternatives to a second mortgage is simply to maximize the available mortgage on one property to allow the second property to be purchased for cash. Technically, if the additional mortgage is taken out with a different lender, this is also considered as a second mortgage, but as it is on the same property, many of the issues that can arise from a second mortgage such as proving an adequate rental income may be minimized.
In order to obtain a larger mortgage on the one property, it will be necessary to prove to the lender that there is sufficient equity available in the property. For example, a property worth £250,000 already has a mortgage of £100,000; the absolute maximum by which a lender would be prepared to increase the mortgage would be around £150,000, although some lenders will still insist on only lending up to 90 percent of the property value. This means that the additional mortgage would be no more than £125,000.
It will also be necessary to prove that the investor’s income is sufficient to be able to pay back the increased mortgage.
Equity release is a popular option for investors looking to purchase a second home abroad but who do not want to obtain a foreign mortgage. By increasing their mortgage on a UK property, the investor can then purchase abroad in cash.
With most buy to let or second home mortgages, a lender will generally only consider lending up to approximately 80 percent of the value of the property, as opposed to potentially 100 percent of the value of the main residence. The higher the deposit that can be put against a second property, the more favourable the other terms are likely to be such as interest rates and availability of discount periods, etc. Therefore, it pays to gather a reasonable mortgage before applying for any second mortgage.
One of the best ways to achieve this is to use equity release on your current property to provide the deposit and then to obtain a second mortgage on the second property. By taking this approach, a more favourable second mortgage can normally be obtained. This method of financing a second property is one of the most commonly used methods by property investors when looking to purchase third, fourth and subsequent properties.
If a second mortgage is not desirable, or a better rate can be obtained by extending an existing mortgage, equity release may be a possible alternative for financing a second home;
increasing the mortgage on a main residence will require that there is sufficient equity in the property for release
and that the income of the investor can support the increase;
even if a second mortgage is desirable, equity release may provide a way of obtaining a sufficiently large deposit to be able to take advantage of the better rates.