The common reasons for a second residential mortgageUnlike buy-to-let mortgages for landlords, paid for through the rent on the house, a second residential repayment mortgage represents a significant additional expense for the home owner. While lenders are more than happy to loan second residential mortgages, the circumstances must be right and they will be keen to make sure you can afford the repayments. Understanding your reason for wanting a second home is key and will play a large part in finding the right mortgage deal.
A city flat for work reasons
A secondary work residence is not uncommon if your work takes you far from the family home or has extended hours. Many inner city workers in the capital, for example, have a smaller second weekday-home in addition to their family home outside of London. While a second home in this way might be considered a serious expense, often the savings in a regular commute mitigate the expense somewhat.
A holiday home
Having a second house in the UK for regular family holidays is another valid reason for an additional residential mortgage.
As a consequence of separation
Leaving your relationship where children are involved can often lead to an agreement to keep up the repayments on the original family home mortgage, but you will also want your own home to live in. A second mortgage is appropriate in these circumstances.
University homes for children
Being able to support your children in full-time college education though the purchase of a property for their use is something to be proud of. Mortgage lenders will look positively on your buying a second home for your child’s use and will help convert the mortgage to an appropriate buy-to-let interest only mortgage once you no longer have need of it as a residence.
Supporting an older relative
Making a purchase for a parent to live in after their retirement is another legitimate use of a second residential mortgage.
What are the loan-to-value expectations on a second propertyThe substantial outgoing of a second mortgage can place a strain on any income. Lenders are going to want to be absolutely sure that the loan is responsible and that you can manage repayments. Your affordability will be expected to be strong, and the deposit you will need to put down will be larger than that for a first mortgage.
Primary property equity
One important factor that isn’t relevant with a first home purchase is that of your current home equity.
Many lenders (but not all) will be keen to consider your current mortgage and the equity you have in your property, rejecting applications for a second mortgage if the equity you have built up is low.
Thankfully, the level of equity expected is not too high, with most lenders happy if you currently hold 20% positive equity in your main property and some willing to consider you with equity as low as 10%. Assuming that you began your mortgage with a 10% deposit and that the property value has increased a reasonable amount, this level of required equity should be little more than a formality. If you had a 95% LTV on your first property, then it may be some years of regular mortgage payments before you have the required backing for a second mortgage.
Second mortgage LTV
With this taken into account the LTV ratio on your second mortgage is likely be 80% or lower. This would require you to save for a deposit of 20% or more.
If you hold high levels of equity in your primary property, you may be able to remortgage it to release some of the funds and use those as a deposit on a second, but remember not to remortgage beyond 80% LTV as that could make you fall at the first post when your equity in your primary property is taken into account.
Some lenders will look at the combined LTV of both mortgages to determine viability. In this case, attempting to use a remortgage to use as a deposit will have little benefit (or, to look at it another way, that equity will already have been considered).
An example of combined LTV:
The lender offers a combined LTV of 75%. Your main property is valued at £230,000 and has an outstanding mortgage with a balance of £165,000 (equity of £65,000). Your proposed second property value is £150,000.
The total value of both properties is £380,000, so with a 75% LTV, the total equity (current equity plus new deposit) you would need to provide is £95,000 (25% of £380,000). With £65,000 equity in your first home, you would be looking for a final cash deposit of £30,000.