When it comes to taking out a second mortgage, it’s something that you need to think carefully about.
It is possible to get a second mortgage, but whether you should depends on how much room you’ve got in your budget, and what you’re planning on doing with the second property.
If you’re looking to buy a property to rent out, you won’t be able to get a regular mortgage, and you’ll have to be prepared to pay a bit extra.
Have you got room in your budget?
The most important factor as to whether or not you’ll get a second mortgage is how much spare cash you’ve got at the end of the month.
Paying a mortgage is a big financial commitment and if you’re already paying one off, you may not have room to make payments on two. When you apply, the lender will look through your income and outgoings to see how much spare cash you have, and whether or not you can afford to make repayments on a second mortgage.
Should they find you can’t, it’s unlikely you’ll be able to get a second mortgage.
Before you apply, it’s a good idea to look at your budget yourself. To do this, you should collect around six months’ worth of bank statements to compare. Have a look at each and see how much spare cash you have at the end of each month. If there’s not much, or you’re in your overdraft, a second mortgage is highly unlikely for you right now.
However, if you do have a relatively large amount left over, it may be something that’s possible for you. Again, you should weigh up whether you think you’re ready to take on another mortgage, as you’ll have significantly less disposable income if you do.
Looking at your bank statements also means you can see any areas you’re perhaps spending more than you realised. Making cutbacks in certain areas may help to free up some cash if you want a second mortgage in the future.
You will have to live in it
Next, you should turn your attention to what you’re going to use the new property for. Are you going to live there permanently, or is it somewhere you’re going to spend part of the year living in?
To qualify for a regular residential mortgage, you’ll need to be living in the property for a certain amount of time each year. Different lenders will have different rules on this, so you should check with them before you apply.
If you’re planning on buying a home to rent out, a regular mortgage won’t be suitable. You’ll need to consider other options, which may be more expensive. Most lenders will insist you have to take out a buy-to-let mortgage instead, which could have higher interest rates.
Even if you’re planning on buying a holiday home that you rent out while you’re not staying there, you may not be able to get a regular mortgage. As you’ll be making an income from it, you’ll likely need a specialist mortgage instead.
But if you already own a second home with a mortgage on it and you’re wanting to rent it out, you may have to apply for what is called a consent-to-letform. You’ll have to pay a fee for this. However, you won’t be able to do this with all lenders. Some will raise the interest rates and others may ask you to switch to a buy-to-let mortgage instead – you must do what your lender asks before letting the property out.
Be aware that following the introduction of new stamp duty rates in April, you will now have to pay a higher tax threshold if you buy a second property when you’re already a homeowner. You can find out more about this in our blog here.
Don’t get confused by second charge mortgages
Things can get a little confusing here, as a homeowner loan (also known as a secured loan), is also called a second charge mortgage. They’re called this because they are secured against your home but they are of secondary priority behind your mortgage.
You have to be a homeowner to take out a second charge mortgage, because the cash is secured against your home. This means that if you fail to repay, the lender could sell your home to raise the money. If this happens, your first mortgage is the priority, which means the cash will go to this lender first, and any left over will go to your second charge mortgage.
To prevent a situation like this ever happening, you should never take out a secured loan unless you’re comfortable you can afford the repayments. The lender should check your income and outgoings to see if you have room in your budget. But at the same time, you should consider what would happen if your circumstances were to change and you had less money coming in.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.