Our Guide to Second Home Residential Mortgages
The number of people in the UK who now own a second home has increased significantly in recent years, explained a story in the Telegraph newspaper on the 19th of August 2017 – in just 14 years from the year 2000, ownership rose from just 1.6 million to 5.2 million households.
More surprising, perhaps, is the fact that the vast majority of these second home owners have the property for their own exclusive occasional use – only an estimated 3.4% of all such owners become landlords of holiday homes when they let the property out to visiting holidaymakers.
The rise in second home ownership has also coincided with a faltering Sterling exchange rate and a string of exceptionally fine summers, which have made “staycationing” more popular then ever. A report in the Independent newspaper on the 2nd of July 2018 referred to the steadily strengthening “staycation index”.
If you are tempted to join this growing band of second home owners, therefore, your thoughts may already be turning to the availability of 2nd home residential mortgages.
Is a second home mortgage the same as a remortgage or buy to let mortgage?
A second home mortgage is just that – a mortgage that enables you to buy a second home, for use by you and your family for holidays or the occasional escape or retreat from everyday workaday life.
A mortgage for a second home, therefore, is not to be confused with either a:
- remortgage – which is something you might seek to replace the existing mortgage on your current main home when the current deal comes to an end or if you are looking to improve the terms and conditions of your present mortgage; or
- buy to let mortgage – which is the specialist type of mortgage required by landlords of buy to let property for whom rental income is the driving force of their business and the buy to let mortgage has quite different affordability and lending criteria.
The Council of Mortgage Lenders (CML), explains some of the principal differences between residential mortgages and buy to let mortgages, including the assessment of the latter’s affordability according to the rental income expected to be earned by the let property and a repayment strategy on the part of most landlords that anticipates eventual re-sale – so that most buy to let mortgages are interest-only mortgages.
2nd home residential mortgages are for those who genuinely want the enjoyment of a second home – a home away from home, if you will. Perhaps you live and work in the city, for example, and are looking for a second home to which you and your family can retreat at weekends and for holidays.
What are second home mortgages income requirements?
There are a number of second home mortgage providers in the UK and their income requirements, affordability and suitability checks may vary from one to another.
As with any mortgage application, the lender needs the confidence of your ability to repay the loan over the full term of the mortgage. It is not only your current and forecast earnings that are taken into account, therefore, but also your outgoings, including existing borrowing commitments. The latter includes your mortgage repayments on your current principal home, as well as any new commitment on your mortgage for a second home.
You must be able to prove you can afford to pay the mortgage on both your existing and new properties. Typically, mortgage repayments on your main home assume a lower proportion of your income – as earnings generally rise over the years – so your capacity to take on a further mortgage for a second home comes within your grasp and your ability to make the repayments is recognised by the lender.
How much deposit will I need for a second home mortgage?
The loan to value (LTV) ratio is between the size of any mortgage advanced and the value of the property in question.
While it may be possible to achieve an LTV as high as 80% on the purchase of a second residential home, most lenders typically require a maximum 60% LTV – the remaining 40% represented by the deposit you put down on the purchase.
As with any mortgage application, of course, the bigger your deposit, the less you need to borrow, the wider your choice of mortgage products, and the greater the chances of your application succeeding.
Is there anything else I need to budget for?
Since the 1st of April 2016, an additional rate of Stamp Duty is payable on any second home you purchase.
For second homes, a surcharge of an additional 3% of Stamp Duty is payable, but since it is a tiered tax, you may pay a different rate of stamp duty on different proportions of the property’s value.
Estate Agents Knight Frank have published the table of Stamp Duty charges that may apply to your purchase and have devised a useful Stamp Duty calculator for those buying a second home.
Is there anything else I need to know when getting a mortgage for a second home?
If you are buying a second property that will become your main home, make sure to inform HM Revenue and Customs (HMRC) first.
This is to ensure you avoid paying Capital Gains Tax (CGT) should you wish to sell the property later – you must pay CGT if you make a profit (sell it for more than you paid for it) if the property is your second home, but not if it is your main place of residence.
CGT is a tax that you may need to pay when selling anything you own that is worth over £6,000 (there are exceptions and one of these is your car, for example).
Calculation of the CGT due depends on the rate at which you pay tax and the amount of profit you make on the sale of the asset – your second home, for example. The calculations are relatively complicated and tax is charged – according to the rate of income tax you pay – on any profit you make over and above a tax-free allowance (which is currently set at £11,300).
Second home mortgages – next steps
While most lenders offer mortgages on second homes, each has their own eligibility and affordability criteria.
This can take a lot of time and hassle to understand and to compare any mortgage deals you may be offered. With our help you can find out in minutes which lenders you are eligible to borrow from, regardless of whether the property in question is a second home retreat for you and your family, a pied-à-terre for your work away from home, or accommodation for a dependent relative.