Second Home Mortgage

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Second Home Mortgage

Second Home Mortgage

Richard Campo explains the mortgage process for Second Homes.

What is a second home mortgage?

This is a mortgage on a property that is purely for you and your family, that isn’t rented out. There’s an important distinction to draw if you are looking at buying a second home. If you plan to rent it out on Airbnb, that’s what we call a holiday let – and there’s a whole different set of mortgage criteria that sits around that.

If you do want to rent the property, go to our holiday let page – that’s far more relevant. Here, we’re talking about a property that’s for you and your family to use that is not your primary residence.

What type of mortgage do you need for a second home?

In essence all mortgages are the same. You can have it set up as interest only or a repayment deal. You might choose a fixed or variable rate mortgage – it’s very similar if not identical to a normal residential mortgage.

What you need to think about is whether you will fit within the lender’s criteria – that can vary a lot if you’re buying a pied-a-terre to avoid a very long commute, compared with a holiday home that you visit a couple of times a month. The assessment will be different – we’ll touch on this later. The quick answer is that you need a second home mortgage, but it is essentially a standard residential mortgage.

Is it difficult to get a mortgage for a second home?

It’s not difficult if you’ve got the required deposit and income – that’s always the key thing in mortgages. It’s not difficult per se, but anything’s more challenging if you don’t know what you’re doing.

You might go to your bank about this idea and find that they want a huge deposit, or put you off in some way. But don’t be disheartened. As a broker we deal with hundreds of banks and we know where to go.

That said, most banks will want around a 25% deposit, there may be a minimum age and there are some rules around the location – for example, your second home can’t be within a certain distance of your main residence.

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What are the affordability criteria for a second home mortgage?

Banks assess this in one of two ways. The first is to add your current mortgage to your potential new mortgage and look at whether your income covers everything.

If you have a very high income and you’re not looking for a huge loan then that might be absolutely fine. But in our experience that’s unusual. We tend to lean towards banks that take your existing mortgage as a credit commitment, much as they do now if you have a car loan or childcare costs. That’s deducted from your income and then the loan is then assessed on what’s left.

To give you a simple example, if you had an income of £100,000, the total you might be able to borrow is a multiple of five – £500,000. But if you already have a £250,000 mortgage, the first method of assessment will only get you a loan of around £250,000.

With the newer method, if your current mortgage is £1,000 a month you take £12,000 off your annual income. That leaves you £88,000 left of accessible income. You multiply that by five to get the loan amount – which is £440,000. So you can literally double the amount you can borrow based on that assessment.

Other outgoings like loans, credit cards and childcare costs are also taken off your income as well. So broadly, if you take off all your outgoings from your income, and multiply what’s left by five, that’s a very rough indication of what you could borrow.

How much deposit will I need for a second home mortgage?

Most high street banks will want about a 25% deposit for a second home, but a small number might allow as little as a 5% deposit. So don’t be put off by a bank saying they need a 40% deposit – we can go to a different provider. If the affordability works, you can get away as little as a 5% deposit because this is fundamentally a residential purchase.
What if I have bad credit? Will that prevent me from getting a second home mortgage?
As always, it depends, but it’s not a show stopper if you’ve had bad credit. Talk to us. It’s simple to figure out if we can help or not.

Also, coming out of Covid, we find that banks are much more understanding – because it’s been tough for everyone. Your credit record goes back six years, so the legacy from Covid will go on until 2028. But don’t let that put you off. Generally it depends on what happened, how big the debt was, why it occurred and the timeline.

Anything over six years ago doesn’t even show in your credit file, so it doesn’t matter. Even if you have had a CCJ or a default within the last six years that’s absolutely fine – chances are we can find you a lender.

If you have had more recent, larger issues, we can normally find you a lender but the interest rate will be a bit higher and the deposit might be more.

Are there any other requirements that mortgage lenders have for second homes?

An important one to remember is that you can’t rent the property out. There might be a temptation to list it on Airbnb or even find a tenant for three to six months – but you can’t do that within the conditions of the contract.

Most banks also don’t like a property to be unoccupied for 90 days or more and that might also be a requirement of your buildings insurance. If it’s likely to be vacant for a long period of time, please talk to us about that. Invalidating your buildings insurance is a massive risk to you, and we can find specialist insurance to meet your needs instead.

How can a mortgage broker help?

A lot of people will typically go to their bank first and foremost. But if that hasn’t got you what you need, please talk to us because we have access to hundreds of lenders. We have literally thousands of products to pick from.

Now, post-Covid, more than 80% of mortgages – and more for some lenders – come via brokers. For that reason we get better deals, so we can get the right thing in place and potentially find it cheaper.

When we work with you, we have your interests at heart. When you deal with the bank, it’s more “take it or leave it”. It’s a very different experience, so if you’re not already working with us, give us a call. We’d love to help.

Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. There may be a fee for mortgage advice, however the precise amount will depend on your circumstances. If a fee is charged, a typical fee is £495.