A Guide to Second Home Mortgages

Many homeowners will consider purchasing a second property either as a holiday home or to rent to tenants to generate additional income. Regardless of the intent, if you have an outstanding mortgage on your existing property, you will need to take out an additional mortgage to cover the cost of the additional property.

On average, mortgage lenders offer an 80% mortgage on second properties, requiring buyers to produce a 20% deposit (reference). However, individual circumstances surrounding your existing mortgage and financial history could influence the confidence that a lender has in your ability to repay a second mortgage. Therefore, a higher deposit might be needed to secure a second home.

In this article, we will discuss how much of a deposit you might need for your second home. Here at Eden Hawk Financial Solutions, we are experts in the mortgage industry. Our experienced mortgage brokers can help you find the most suitable mortgage for your second property with the rate and a deposit that suit your needs.

What is a mortgage deposit?

As an experienced buyer, you likely would have contributed towards or paid a deposit for the mortgage on your previous property. This sum of money is the cash deposit paid upfront when taking out a loan to purchase a property. It will eventually become equity in your home, meaning it becomes a portion of the property that you already own outright.

Depending on how much you have saved, a larger deposit will enable you to receive a lower loan-to-value ratio on your mortgage. This means that you are able to contribute a larger proportion of the property’s value without a mortgage. With a higher deposit, buyers typically receive better rates on their mortgages.

Factors affecting how much deposit you will need for a second home

The individual financial circumstances of each borrower will differ greatly when taking out a mortgage. Like any financial product, you will be subject to the lenders criteria to ensure you are an appropriate candidate for a loan.

Lenders are continually looking to secure their investment by ensuring the affordability of their lending applicants and securing the loan against a reliable and accurately priced property. Therefore, whether it is your first or second mortgage, the following factors will continue to determine your lending eligibility and the amount of deposit you may be required to pay.

• Mortgage type

Different types of mortgages could affect how much deposit is required for your second property. Typically, how you intend to utilise the new property will influence how much deposit is required. Investing in buy-to-let property will require a larger deposit than a secondary residential mortgage. We’ll discuss why this is the case later in the article.

• Financial History

Like many finance applications, a lender will run a hard check on your credit score to assess your borrowing history. They will look for any arrears, signs of late payments or positive traits towards your credit history.

Additionally, you can expect lenders to evaluate your conduct surrounding your existing mortgage. How consistent you are with mortgage payments will provide a strong indicator of the likelihood that you will be approved for a second mortgage. If your borrowing history indicates that you are an unreliable borrower, you may require a far larger deposit.

• Affordability criteria

Mortgage lenders considering an application for a second property will be highly conscious of the strain that two mortgages can have on your financial stability. They will conduct thorough calculations to determine whether your current income and outgoings are indicative of your affordability for a second mortgage. If the lender is unsure that you are able to afford payments on a second mortgage, you may require a significant deposit in order to secure your additional property loan.

Amount of deposit required for different mortgage types

The amount of deposit required for a property will vary depending on the mortgage type you apply for. As we have briefly mentioned, buy-to-let mortgages and residential mortgages often differ in their eligibility criteria. Buy-to-let properties often start with a 20% deposit but could require as much as 40% of the purchase price to secure the loan.

Whilst some buy-to-let mortgages are available with larger LTVs, requiring less deposit, this is accompanied by higher rates. The main reason for this is that lenders often see tenants as far riskier than owner-occupied properties.

Releasing capital from your home for a deposit

Saving 20-40% of a property price for your deposit can take a significant amount of time, especially whilst completing your existing monthly mortgage payments. If you are looking to accelerate this process, you can consider releasing equity from your current property to be used towards your second mortgage.

The two most straightforward methods of releasing equity from your home to fund a second mortgage are either remortgaging or using a second charge. Remortgaging allows you to borrow more money against your property to free up funds, meaning your monthly payments will increase. A second charge loan is separate from your existing mortgage but is also secured against your property and needs to be repaid.

Final Thoughts

Investing in a second property can be a fantastic investment opportunity whether you are interested in generating a rental income or simply enjoying a second home. However, due to the perceived risk associated with lending to existing mortgage holders, lenders often require a significantly larger deposit to secure your loan.

Whilst many residential properties can be purchased with a deposit as small as 5% of the property value, second-home buyers will need to find up to 40% of the property value. If you are interested in assessing mortgage rates for second homes in your area or need any financial advice surrounding a second home deposit, don’t hesitate to contact Eden Hawk Financial Solutions.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE.

Risk Warning

Some Buy to Let Mortgages are not regulated by the Financial Conduct Authority.
Second Charge Mortgages/Secured Loans are by referral only.