It’s often said an Englishman’s home is his castle and now it seems we’re expanding. More of us are deciding to purchase a second property for a variety of reasons. If it’s a path you’re thinking about and you’d need to take out a mortgage for your plans, there are some things to keep in mind.
Research from the Resolution Foundation found that one in ten families now own a holiday home, Buy to Let or overseas property. It equates to 5.5 million people now owning a second property, with a combined value of £941 billion.
The biggest portion of this is linked to Buy to Let properties, with 1.9 million people earning an income through being a landlord. It’s a trend that’s really gained traction in the last two decades; the number of Buy to Let landlords has risen 15 times since 2000. Unsurprisingly, the majority of the rental income generated goes to baby boomers, accounting for around 52%. However, the findings suggest that owning a Buy to Let property is aspirational for younger generations too, a quarter of rental income is already going into the pockets of generation X.
The report identified three major reasons why second homeownership is on the rise:
- Providing income
- Giving security in retirement
- To pass on wealth to younger generations
Whatever your reason for considering a second property, you may have to take out a mortgage to realise your plans. If you do, there are some things you should be aware of.
1. Your credit score is still important
You might think that because you already have a mortgage, the process will be easier this time. In fact, lenders are likely to be far more stringent with a second mortgage. As a result, checking your credit score, and improving it where necessary, is just as important as when you took out your very first mortgage. Getting all your paperwork organised before applying for a second mortgage should be considered a priority.
2. Lenders will stress test your ability to pay
Lenders are required to ensure you will be able to meet repayments on your mortgage, including if interest rates were to rise. If you’re still paying a mortgage on your main home, you need to carefully consider how your income to expenditure ratio will appear to a lender. Lenders will set their own criteria on what’s affordable here, but it’s worth doing your own calculations and considering how a second mortgage may affect your lifestyle.
3. You will usually need a larger deposit
When taking out a mortgage to purchase a second home, expect to need a larger deposit. Whilst you can secure a mortgage with a 95% loan to value (LTV) ratio for your main home, you’ll be hard pressed to do the same for a second home. Usually, you’ll need at least 25% deposit to be approved for a mortgage on a second property.
4. Associated fees may also be higher
When you’re taking out any mortgage, it’s important to factor in all one-off costs. With a second home purchase, you may find that fees, such as those for valuations and legal work, are higher than when you’re taking out a traditional mortgage. This isn’t always the case, but it’s worth keeping in mind as you set out a budget for your second home.
5. Competitive interest rates may be harder to find
Interest rates have remained low since the financial crisis, benefitting those still paying off a mortgage. However, as a second home represents a greater risk to lenders, expect the interest rate you secure to be higher than that on your first home. It’s still worth shopping around though. Even a small difference in interest rates can save thousands of pounds over the length of the mortgage.
6. Lenders will be stricter if the property is abroad
Are you dreaming of buying a second property abroad? A holiday home is certainly attractive, but it can make securing a mortgage more difficult. Lenders are likely to be cautious due to fluctuating currency prices and an unfamiliar property market. That doesn’t mean you should shelf your plan for a property abroad but be aware that the amount you can borrow may be restricted.
7. Stamp Duty will be greater on your second property
As you’re buying a second property, Stamp Duty will be more. Whether it’s a holiday home or Buy to Let, an additional residential property valued at more than £40,000 sees Stamp Duty increase by 3%. You can see how second property Stamp Duty compares to that of your main home in the table below:
|Property value||Stamp Duty on main home||Stamp Duty on additional property|
|Up to £125,000||0%||3%|
|Over £1.5 million||12%||15%|
The Stamp Duty rate only applies to the part of the property price falling within each band.
8. There are different mortgage options
You’ll also need to consider the type of mortgage that you need to take out: residential or commercial? If you hope to let out the property as a holiday home, even if you plan to use it too, you will need a commercial mortgage, for example. In addition, you should also consider if a fixed, tracker or variable rate mortgage is right for you.
If you’re hoping to take out a mortgage to purchase a second property and are searching for some guidance, please contact us.