With pensions getting bad press and people of all ages beginning to look for alternative ways to secure their future financial health, it is no surprise that the number of individuals owning second properties has sky-rocketed.

Many people purchase second properties with a view to letting the property out on a long-term basis, thus ensuring that the mortgage is paid and allowing the owner to generate capital gains with the increase in the value of the property, over the years. This theory seems to be working quite well for many buy to let investors, but it is worth being aware that success is dependent on many factors including:

Second Mortgages for Holiday Homes

Some second homes are purchased primarily as holiday homes, but also in the hope that they gain in value, over time, allowing the investor to sell them off to fund retirement, later in life.

Other Second Home Mortgages

Less common ideas include purchasing second properties for children to live in, typically whilst in university, or second homes for renovation and then resale.

What is a Second Home Mortgage

Simply put, a second home mortgage is a mortgage on a property other than the one that is your main residential home. It is not essential that a mortgage is already held on the family home; if you do not live in the property that you are mortgaging then it is a second home mortgage as you live elsewhere.

This may seem confusing that, even if you do not have a mortgage on a family home, a mortgage on another property would be seen as a second mortgage. Whilst this is true, the way in which the amount of mortgage that you are able to obtain is calculated will be different, if you have no other mortgage.

For example, when applying for a mortgage (either as a main home or as a second home) it is necessary to declare any loans or borrowings to which you are already committed. These loans (or mortgages) are taken into account when determining how much you can reasonably afford on the new property. If you already have a big mortgage and your income is not correspondingly large, a lender might be reluctant to give you a second mortgage, without proof of alternative income, as is the case with buy to let.

Call an expert now 0845 643 9941

Request a Call Back

Second Home Mortgage as an Investment

The vast majority of second home owners are doing so as some sort of investment plan. Whether the property is being purchased as a buy to let property to generate an immediate income stream as well as long-term capital gain, or as a holiday home for personal use with the hope of longer term gain, they are all considered to be investment properties.

In fact it is very rare and generally only reserved for those who have a split life that requires bases in two or more locations, for individuals to own more than one property simply to live in, with no expectation of capital or income gain.

Funding Second Home Mortgage

One of the obvious ways to finance a second home is with a mortgage on that property. When obtaining a second home mortgage it is vital that you consider from the outset the purpose that the property will serve and what, if any, income will be derived from the property. All these factors will affect your choice of mortgage and crucially, how much you will be able to borrow.

Buy to Let in the UK

If your intention is to purchase a property within the UK and let it out as a way of funding the mortgage, then you will have to prove to the mortgage company that the rent will cover the amount of mortgage for which you are applying.

Typically, lenders will ask for evidence that you are likely to achieve a rental of at least 120 percent (often in excess of 130 percent) of the mortgage payments, to allow for vacant periods and other costs such as insurance. Buy to let lenders will also normally require that you have a deposit of at least 20 percent to put into the purchase.

Buy to Let Abroad

For a property abroad which you intend to let, the requirements are likely to be similar, although there is the added complication that many UK lenders will not offer mortgages on property outside the UK. Furthermore, those that do offer foreign mortgages may only do so in a restricted number of countries.

Therefore, it may be necessary to obtain a mortgage in the country where you are purchasing the property; this will require local advice from both lawyers and financial experts. There is also the added issue of having to take a mortgage in a foreign currency which can mean that you incur added costs in converting that currency back into sterling. For these reasons, many investors intending to purchase a second property abroad will actually remortgage their family home to finance the purchase, thus negating the need for a foreign mortgage.

Friendly and knowledgeable advisors 0845 643 9941

Get help finding a Second Home Mortgage today.

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.

Other Issues to Consider

A second home that is for investment purposes will potentially be subject to multiple different taxes which, if not planned for, can turn a very lucrative profit into a substantial loss. Bear in mind that not only will you have the capital gains tax element to deal with on sale, but there are also regular taxation issues with rental income which have to be dealt with, immediately.

It is absolutely essential that these taxes are planned for as early on as possible, ideally before the sale is even completed; tax planning methods exist that can be used from the very beginning which will assist you in the long-run. Always make sure that you speak to an accountant or tax advisor about your individual circumstances.

Income Tax

Any income that you receive from a rental property should be disclosed to the Inland Revenue. Technically, this means that any income you make on the property will be taxable at the rate at which you pay income tax on your other income from your standard employment.

From the income that you obtain from letting a property, there are some allowable expenses which can be deducted. Typically, these expenses include rates, insurance and administration costs. Importantly, with a mortgage on a second home, interest paid on a loan can also be claimed as an expense. Therefore, the interest part of any mortgage on the second home can be deducted from the income, reducing the rental profit that is taxable.

If a property is furnished, you are also able to add expenses of up to 10 percent of the net rental profits for wear and tear replacement.

Capital Gains

A second home that is sold and is not the main residence of the owner will be subject to capital gains tax of 40 percent. This can have a serious impact on the profit made from the second property and can even mean that you do not have sufficient capital available to repay the second home mortgage.

Capital gains are not payable on the main residence, and those who own more than one property can ‘elect’ which property is to be considered their main residence within 2 years of purchasing the second property. Capital gains is a difficult and complicated process but, in short, tax will only be payable on the time that the property was let and if the property was once a main residence; the last three years of ownership will also be exempt. Currently, there is also an allowance of up to £40,000 for this capital gain.

Example: an individual purchased a flat for £100,000, lived in it for 1 year before renting it out for the last four years and is now selling the flat for £200,000. The gain per year is, therefore, £20,000 (there would be some deductions such as any capital improvements that were made as well as the cost of purchase and sale, but for the sake of ease of calculation these have been ignored). The first year is exempt and the final 3 years are also exempt as it was once a main residence. Therefore, there is only 1 year on which capital gains are due. As this is only £20,000, the £40,000 allowance amply covers this gain and no tax is due.

Call an expert now 0845 643 9941

Request a Call Back

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.

Equity Release

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.

Deposit Difficulties

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.

Your home may be repossessed if you do not keep up repayments on your mortgage

Working With Leading Lenders

Providing specialist mortgage advice nationwide with access to thousands of mortgage products from a wide range of lenders.