Are you thinking of buying a second home? There are plenty of reasons why you should and we briefly discuss some of these below.
But if you are planning on buying a second house, you will need a second mortgage for your second residential property. Thankfully, most lenders will be prepared to lend to you although you need to make sure you can afford the loan to value (LTV) on your second home mortgage.
In this guide, we will look at second home mortgages and the type of LTV ratios you can expect on an additional mortgage.
Reasons to get a second residential mortgage
Getting a second mortgage isn’t uncommon. People want to buy a second property for a variety of different reasons so provided you can afford the extra expense, you should be able to find a mortgage provider who will lend to you.
Reasons for getting a second mortgage include:
A flat or house needed for work purposes
If you regularly need to travel for work purposes, it makes sense to have a second home if you are away from your usual house for long periods. Lenders often give mortgage approval to customers in such circumstances, provided they have kept up with payments on their current mortgage.
A university home for your children
If your children are off to university, you may want to purchase a home on their behalf so they have somewhere to live for the duration of their course. If they decide to move on after their course has ended, lenders will usually let you consider buy to let mortgages if you want to rent the property out to students or any other interested parties.
Property for an older relative
You might want to move your older relative closer to you if their health isn’t what it used to be. You might also want to purchase them a downstairs flat or a bungalow if mobility is an issue.
A holiday home
Hotel prices can be exorbitant so you might decide on a second home for vacation purposes if you want to avoid paying these. Lenders will often let you take out a residential mortgage for this purpose and they might also allow the possibility of buy to let mortgages if you choose to rent out your holiday property in the future.
What is an LTV mortgage?
When discussing mortgages with you, the lender will usually refer to the LTV.
The LTV is the ratio of what you borrow on a mortgage against the property’s value. It is always expressed as a percentage.
So, if you wanted to buy a home that was worth £200,000 and borrowed £180,000, the LTV would be 90%. In this scenario, you would be borrowing 90% of the property’s value. You would then need to pay £20,000 as a deposit, via your savings or the released funds from your first home’s equity.
If you could afford to pay a bigger deposit, such as £40,000, you could borrow 80% of the property value with an 80% LTV mortgage.
To secure better deals and lower interest rates, it is usually advisable to choose something with a lower LTV.
For more mortgage advice on this topic, check out our extended guide on loan to value mortgages.
LTV on a second mortgage
When considering the LTV, it is important to know what you can and can’t afford. This is especially true when looking at a second residential mortgage as the extra mortgage payments will put an increased strain on your finances. As such, it might be useful to use a mortgage calculator when working out your expected payments.
To make sure you get the right mortgage, consider which LTV loan will be right for your financial needs.
With a higher LTV mortgage, such as 90%, you will have more interest to pay over the long term but you would only need to make a smaller deposit.
A smaller LTV mortgage, such as 80%, means less interest over the long term but you would need to make a higher deposit.
Choosing something with a smaller LTV ratio is often the best option as with less interest to pay, you will make savings over your mortgage term.
Of course, if you can’t afford to pay a large deposit, such as 25% of the property’s value with a 75% LTV loan, you may have to consider a higher LTV.
It’s also worth taking into consideration the combined LTV as some banks and building society will take this into consideration as this will no longer be your only mortgage.
Will I be eligible for a second mortgage?
As was the case when you acquired your first mortgage, your lender will consider your affordability. They need to be sure that you can manage the extra repayments so they will take your income into account as well as any other financial liabilities, such as your existing mortgage repayments and any other debts you owe.
The lender might also use the combined LTV of both your existing mortgage and your second when determining your viability.
How much deposit am I expected to pay on a second mortgage?
Many lenders cap the LTV at 80% so you may have to pay a deposit of 20% or more of the property value.
However, it’s not impossible to get an LTV at 85% or even 90% though your choice of deals may be limited. Your chances of being offered a higher LTV will be improved if you can pass the lender’s eligibility requirements.
Can I release equity from my first home for the deposit?
Yes, you can release the current equity from your first property to raise the deposit for your second property.
If you own the property outright, the total value will be the equity. If you still have an outstanding balance to pay, your equity will be the property’s value minus the remaining mortgage debt.
In some cases, lenders may reject your application if the equity you have built up is low.
Thankfully, many are willing to consider equity as low as 20% and even 10% so assuming your original mortgage had a deposit of 10% and the value of your home has risen, you should be able to take out another mortgage.
Getting a second mortgage
If you want to take out a second residential mortgage, the team at YesCanDo Money is here to help. As a whole of market mortgage broker, we have access to a wide range of mortgage providers who are prepared to offer second mortgages to their customers. We can also give you advice on buy-to-let mortgages if you choose to switch to one of these after buying your property.
We will search the market on your behalf, give you mortgage advice that is related to your personal circumstances, and will work hard to make sure you get the right mortgage for your needs.
We will also give you financial advice after taking your outstanding mortgage into consideration. As you will have extra payments to make, it is important that you only consider an LTV mortgage that you can afford to ensure you can pay back the repayments on your mortgage.
For more information, get in touch with our team using the contact details on our website, and book an appointment to receive the mortgage advice that you are looking for.