Financing a Second Home
Most people looking to buy a second home will not have the cash available to buy the property outright and instead will need some form of mortgage or loan. There is still a large choice of residential and commercial mortgages available for second homes from high street banks, building societies and specialist loan companies. Before you Google the cheapest mortgage rates your first action should be to seek professional financial advice from a qualified IFA. They will usually have a wider choice of products available if they are ‘whole of market’ approved. Beware that some friendly mortgage advisers who are affiliated with a local estate agent may only be permitted to sell ‘tied products’ with a small number of lenders.
Despite the dwindling number of second home mortgages available since the advent of the credit crunch, there are still quite a few specialist mortgages designed for equity release and standalone mortgages for holiday lets. Some people may prefer to deal with lenders directly by shopping around on the Internet and comparing mortgage rates for second homes. The internet is great for comparing rates the level of personal service is not always comparable with dealing face-to-face with a local mortgage broker.
When you apply for your second home loan you’ be required to divulge personal information regarding your financial situation and suitability. It is likely that lenders will want to know details about your personal income and lifestyle expenses, to build up the financial picture of whether or not you could support the loan. This will involve agreeing to have a credit check on your personal finances as well as submitting copies of bank statements, pay slips and any other supporting documentation lenders feel is appropriate. The application form may include questions about your credit worthiness and any additional personal debts which impact your ability to service a big mortgage. The credit check will be based largely on a scoring system skewed towards a long track record of reliable and consistent repayment of debt. This automated mentality will make it more challenging for first-time buyers to purchase multiple properties whether for investment or as a second home.
Generally speaking you will find it more difficult to obtain a second home loan than for your first residential mortgage because you are inherently borrowing more money (which may push your ability to repay to the absolute limit). Lenders will need to understand whether or not you’re planning to let out your second home at any point and whether you will be relying upon this rental income to repay the mortgage payments. The additional risk of further borrowing is likely will be reflected in the interest rate offer you are likely to receive (which in most cases is more expensive than normal residential mortgage rates). You may find a similar experience when you shop around for suitable second home insurance to protect your new property. The greater the risk the higher the premium is likely to be.
Your IFA or mortgage broker can advise you on which type of second home loan is most useful for your individual needs. Many ‘secured loans’ will be linked to your own residential property asset as the basis of security. Whereas many buy to let mortgage products are more geared towards amateur landlords and focus on annual rental return, void periods and tenant types. Nevertheless if you’re planning to let out your second home (which is a fairly popular activity for holiday homes located in popular hotspots) be sure you make the lender aware that this is your intention. Failure to disclose any material facts may put you in breach of the mortgage conditions. Lastly the number of interest only loans available for second homes has radically reduced since 2007 (as lenders have become extremely cautious about homeowner’s ability to service huge debts relative to income).
One of the key factors in your ability to obtain finance for your second home will be the size of your mortgage deposit. At present many lenders are insisting on huge deposits between 25% to 40%, depending upon the nature of the risk. If you do not have this sort of funds readily available or have substantial equity in your own home to release, it is unlikely you will be able to obtain finance for a second home. The days of the pre- credit crunch 100% percent mortgage obtained (with an online application and normal credit checks) are well and truly over! Ability to to obtain a large deposit is the key reason why the majority of mortgages approved for purposes of buying a second home are with applicants who are middle-aged between 40 and 50 (who have built up substantial equity in their adjusting property).
Lastly if the lender’s own valuation differs wildly from your mortgage application it may result in the application being rejected. Loans for second homes in the United Kingdom are more readily available than those for second homes and holiday homes based overseas as they are more easily valued. Many lenders have shied away from traditional expat sunshine countries which are now suffering from the spectre of negative equity. The last thing lenders want to be stuck with is repossessed second homes that they can’t even resell to recoup the value of the original monies they lent to the borrower. Likewise mortgage lenders own UK valuation agents will also assess the individual area within the UK to consider what is likely happen to property prices in that area in the future. Many economists are divided about the long-term prospects for second homes (as the general trend has been a sharp increase during a period of protracted low interest rates).
Contact Assetsure for a Second Home Insurance quote.