Whatever your reason for buying another property, you might be glad to know that it’s possible to fund it with a second mortgage.
In this guide, we’ll find out what lenders look for in order to feel comfortable giving you another mortgage, talk about alternative financing options, and take a quick look at the tax and other costs that come with second properties.
Let’s start with a second mortgage. This is a long-term loan in your name that’s completely separate from your first mortgage and secured against your second home.
There are other ways to get the money needed to buy a second property too, and we’ll look at those in more detail later.
How do you go about getting a second mortgage?
The process for getting a second mortgage is similar to getting your first. You’ll have to:
- Contact your existing lender and/or check out others for better offers
- Choose a mortgage that works for you
- Get your documents in order
- Ask a lender for an agreement in principle (AIP)
- Sort out a solicitor
- Make a full mortgage application
- Wait for your mortgage offer
Check all this out in full in our article on how to apply for a mortgage.
But for second homes, lenders want you to tick a few more boxes. Surprisingly, having one mortgage already doesn’t make you look more responsible to lenders. In fact, they just see your existing mortgage as more debt.
So, you’ll have to prove that you can afford the mortgage repayments on both properties, and you’ll need a higher deposit. We’ll look at the requirements based on what type of mortgage you need next.
What type of second mortgage do you need?
The type of mortgage you need depends on what you plan to do with your second property.
1. Residential mortgage
This is for people who want to buy a second property to use themselves. You might be splitting your time between your primary residence and the additional property to reduce commute times, or using it as a holiday home. It’s also OK to get a residential mortgage if you’re buying a home for a family member to live in rent-free, but there are potential tax implications for this, which we’ll talk about later.
To prove you can afford a second residential mortgage, you’ll need to provide:
- Documents to demonstrate an excellent credit score, showing that you’re reliably paying back existing debts like your first mortgage, credit cards and any other loans you might have.
- Proof of stable employment and income that would comfortably cover both of your mortgages.
- Bank statements that prove you can make a large deposit — this is usually a 15% minimum deposit for a second residential mortgage, depending on the lender.
2. Buy-to-let mortgage
If you want to raise extra income by renting an additional property to someone else, you’ll need a buy-to-let mortgage.
If your second mortgage is a buy-to-let mortgage, lenders want to see:
- A good credit record.
- Evidence that you can afford the mortgage repayments on another property. This could include information on the rental market in the area you want to buy and the expected rental income, as well as your personal income and details of other financial commitments.
- Proof that you can afford a larger deposit — lenders often require 25% for buy-to-let properties, but can ask for up to 40% in some cases.
Many lenders also want you to be a homeowner to qualify for a buy-to-let mortgage.
One benefit of buy-to-let mortgages is that they can be interest-only (meaning you just pay off the interest on your loan, rather than the loan itself). This is because the aim of your investment can be to make money from rent for the duration of your mortgage term. Then you can sell the property to pay off the lump sum at the end.
Read more about interest-only mortgages here.
3. Holiday home mortgage
There’s a specific holiday home mortgage for those who want to make lots of money from their holiday home. If you rent out your property for more than 210 days a year, you’ll need one of these mortgages. If you plan to rent it out less than this, a residential mortgage should cover you.
Are there other ways you can finance a second home?
We’ve talked a lot about second mortgages, but this isn’t the only way you can raise funds to buy a second property. Here are your other options.
Replacing your existing mortgage with a new one is another way of raising funds to buy another property.
If you’ve paid off a decent chunk of your mortgage or your property has increased in value, you’ll have built up equity in your first home. By equity, we mean the portion of the property that belongs to you rather than the bank.
By remortgaging, you can release this equity and use the money to either buy a second property in cash (if you’re lucky) or use it as the deposit for one of the second mortgages discussed above. Remortgaging might allow you to reduce the monthly repayments on your first mortgage, freeing up income to spend on a second.
If you still have a mortgage on your first property, it’s important to check for any early repayment charges. It might be sensible to wait until the end of any fixed-term deal (meaning you’ve been offered a certain level of interest for a fixed period) before remortgaging.
You could choose to stick with your existing lender, but many people use this time as an opportunity to shop around for a better deal.
Read more about remortgaging to release equity here.
Equity release is a specific type of loan only available to over 55s. There are several different equity release products, but the most popular is something called a lifetime mortgage.
With a lifetime mortgage, you get a tax-free cash lump sum from the equity in your home without having to sell it. You don’t have to make any monthly payments either — the money you borrow and interest will be paid off when you go into care or pass away and your house is sold.
Keep in mind that equity release comes with some risks. You will not be able to leave your home as an inheritance. And you might stop being eligible for means-tested benefits or pension payments, or have to change the amount of tax you pay.
You have a lot of options when it comes to funding a second home. To make sense of them, speak to a mortgage broker (like Habito) for tailored, impartial advice.
What tax do you have to pay on second homes?
Stamp Duty Land Tax
Stamp Duty is the tax you have to pay when buying a property or piece of land worth over £125,000.
You’ll usually have to pay 3% on top of standard stamp duty land tax (SDLT) rates when buying a second home. You can use the government’s SDLT calculator to work out exactly how much this will be.
Capital Gains Tax
Depending on the situation, the government might tax the amount your property goes up in value while you own it. For example, if you bought a property at £250,000 and sold it at £300,000, you’d have to pay tax on the £50,000 it went up in value. You’re given an annual CGT allowance of £12,000, though, so in this example, you’d only have to pay tax on £38,000.
This payment can seriously cut into the profits you make from selling your property, so keep it in mind.
As we mentioned earlier, you can use a residential mortgage to buy a property for a family member to live in rent-free. If you want to gift this property to them later, though — so that the property is in their name — you’ll have to pay the same CGT as if you’d sold the property.
Want to know whether you can afford a second mortgage? Take a look at our mortgage calculator for a clear idea of what you might be able to borrow.