If you already own your home but are thinking about buying another property, you may be wondering whether you can get a second mortgage. If so, how would it differ from your current mortgage and would it be harder to apply for? Here, we’ll explain everything you need to know about second mortgages.
Can you apply for a mortgage if you already have one?
Yes, the good news is that you can apply for a second mortgage. Just be aware that the application criteria are stricter as a second mortgage increases the level of risk for a lender. They will need to ensure that you can comfortably afford to continue making the repayments for your current mortgage as well as the repayments for a second mortgage. To do this, you will need to pass stricter affordability checks and the lender will check your creditworthiness. You usually need to pay a higher deposit and the interest rates for second mortgages tend to be higher too.
How does a second mortgage differ from a second charge mortgage?
It’s important to understand that a second mortgage is completely different to a second charge mortgage. A second mortgage is an entirely separate mortgage from your current one and is secured against the new property. As such, you have two different mortgage repayments to make each month. If you default on your second mortgage, you risk the property that it relates to being repossessed.
A second charge mortgage, however, allows you to use the equity in your home to borrow additional funds. A lender places a second charge against your home and the lender for your original mortgage will have the first charge. This means that your original lender will have priority when it comes to being repaid for the loan should you default on the mortgage. Once that lender has been repaid, the lender with the second charge will be next in line to be repaid.
Why have a second mortgage?
There are lots of reasons why you may want a second mortgage to buy a property. You may want to have a second home but don’t have adequate savings to buy one. This second home could be used as a weekend getaway or to be nearer to work during the week. You could use a second mortgage to buy a holiday home or invest in a buy-to-let property. Depending on what you’re buying the property for, there are different types of second mortgages to apply for.
Types of second mortgages
Second mortgages are split into three main types: residential, buy-to-let and holiday let.
- If the second property will be for your own use, then you need to apply for a second residential mortgage. For example, you may want a property in Pimlico that’s close to your workplace so that you don’t need to do the daily commute during the week. Or you may want a property on the coast or in the countryside to use as a holiday home.
- Buy-to-let. If you intend to rent out the property and earn income from it, you need to apply for a buy-to-let mortgage. This type of mortgage is usually on an interest-only basis. This means that you only pay off the interest during the mortgage term, not the capital. The loan is repaid once your mortgage term has ended, usually by selling the property.
- Holiday let. If your holiday home is to be rented out rather than just for your use, you need to apply for a specialist holiday let mortgage. Some lenders allow you to rent out a holiday home occasionally with a residential mortgage. However, you’re usually restricted with this. For example, you may only be allowed to rent it out for a few weeks per year. A holiday let mortgage, however, allows you more flexibility so that you can earn an income from your holiday home. Just like buy-to-let mortgages, a holiday let mortgage is usually taken out on an interest-only basis.
How much can you borrow for a second mortgage?
The amount you can borrow depends on various factors, such as the lender’s criteria and the type of second mortgage you need. Lenders tend to offer lower loan-to-value (LTV) ratios for second mortgages, meaning that you need to pay a higher deposit. For example, a 15% deposit for a second residential mortgage, 25% to 40% for a buy-to-let mortgage and 30% for a holiday let mortgage.
The outstanding balance of your current mortgage will be taken into account along with your income and expenditure. If applying for a buy-to-let mortgage, you’ll need to meet the lender’s criteria for the anticipated rental income.
Tax implications when buying a second property
When buying a second property, there are different property taxes to consider.
- Stamp duty. For an additional residential property, such as a second home or a buy-to-let investment, a stamp duty surcharge of 3% is payable. This applies to properties valued at over £40,000. For values over £250,000, the 3% surcharge is added to the normal rates. Stamp duty (SDLT) applies to properties in England and Northern Ireland. Additional properties in Wales and Scotland are subject to different charges under the Land Transaction Tax (LTT) and the Land and Buildings Transaction Tax (LBTT), respectively.
- Council tax. This tax is payable on your second property in the same way as it is for your home. Some councils offer discounts for this tax on second properties if you meet the relevant criteria.
- Capital gains tax. If you sell your second property and it has increased in value since you bought it, you may be liable for capital gains tax (CGT).
Should you get a second mortgage?
There are other ways to finance a second property purchase if you’re unsure that a second mortgage is right for you. For example, you can remortgage or take out a second charge mortgage on your home in Bexleyheath. Simply get in touch with our mortgage brokers on 01322 907 000 to discuss all of your options. They’ll look at your financial situation and discuss your intentions for the second property to ascertain the best mortgage product for you. Our second mortgage experts understand lenders’ criteria and will maximise your chances of having a successful application, whether it’s for a second mortgage or your preferred alternative.