Financing a Second Home Mortgage
When it comes to financing a second home mortgage, there are many other options that you could consider to ensure that you make the best possible choice.
As with a standard first mortgage, you will discover that there is the usual question of whether the best mortgage is interest only or capital repayment. However, with a second home, you will also have other personal decisions to make when selecting the best option.
Interest Only v Repayment
This is an interesting debate! Traditionally, it has always been thought best to try to pay off the mortgage as quickly as possible to reduce the monthly payments. Arguably, this might be true of the main residential property, but with a second property there may well be other issues that require consideration.
A long-term investor who intends to keep the property for a decade or more and is planning to use the capital gain as profit at the point of sale in the future could argue that the more they can pay off of the mortgage the better. This is because the mortgage is acting as a savings plan, meaning that there will be greater equity available at the point of sale.
Of course, this only works if the investor has sufficient monthly means to meet the mortgage or if the rental income is particularly favourable.
Many lenders now look at affordability rather than strict analysis of rental income against mortgage. This means that they also take into account your ability to top up the mortgage payments from your other income. Typically, this approach is only really appropriate for those investors who have a large current income and are truly saving for the future.
For those who require a regular income (or at the very least cannot afford to 'top up' payments), then an interest only mortgage might be a better option as this ensures a minimum payment only, allowing you a better chance of achieving a profit on a monthly basis. However, this means that, at the point of sale, there will be less equity and the only capital gain will be the amount by which the property's value has increased. With this approach, there is even a danger that the value of the property will have fallen and the sale price achieved may not even be able to pay back the mortgage.
When making the decision between interest only and capital payments, there are different considerations that come into play with a second home mortgage;
consider why you are investing in the property, what you hope to achieve in the long-term and what you can afford to put into the investment, currently;
interest only repayment may be a good way to fund a property for the smallest possible monthly payment, thus increasing the chances of a monthly income stream, but will result in a lesser capital gain when the property is sold;
capital repayments may put a greater financial strain on the investment, on a monthly basis, but will result in larger capital gains in the long-run;
as with any investment, it is possible that the value of the property drops as well as increases and this could result in a shortfall on sale which would have to be met.