A second, third, or fourth residential home is a common scenario for many people. There are a number of reasons why someone might need more than one residential property, such as work commitments, family reasons, or retirement planning.
When it comes to financing a second home, there are two main types of mortgages: residential mortgages and buy-to-let mortgages. Residential mortgages are typically used for properties that will be used as a primary residence, while buy-to-let mortgages are used for properties that will be rented out to tenants.
In some cases, it may be possible to use a residential mortgage to finance a second home, even if the property will not be used as a primary residence. However, some lenders may require a higher deposit for residential mortgages that are not used as primary residences.
If you are considering buying a second home, it is important to speak to a mortgage broker to discuss your options. A mortgage broker can help you to find the right mortgage for your needs and to understand the different types of mortgages available.
How second home affordability is calculated
The way a mortgage on an additional home is calculated is different to how you might expect. It is also something that even lenders can’t agree on. This makes using a broker essential, as understanding how the bank’s underwriting and credit committees operate is essential to approval.
In the UK, mortgage affordability is generally based around a multiple of 4.5x your income. However, lenders have some discretion over what income they will accept, and they are also allowed to lend more than 4.5x so long as it does not exceed over 15% of their overall lending. This is why some lenders can offer multiples as high as 5.5-6x for select clients.
When you have an existing residential mortgage, this must be factored in for affordability, but it does not impact the multiple of income which can be offered to you. This means you can have an existing mortgage of 4.5x your income with one lender and still apply for up to 5.5x on an additional property.
Other factors that will affect how much you can borrow for a second home include:
- The lender’s appetite for risk
- The amount of deposit you have
- The intended use of the second home
If you are considering buying a second home, it is important to speak to a mortgage broker to discuss your options. A mortgage broker can help you to understand how second home affordability is calculated and to find the right mortgage for your needs.
Property required due to proximity to work
If you require a second, or third additional residential property due to your typical working pattern and commitments, then a residential mortgage is a suitable option. Depending on your level of earnings, an interest-only mortgage can be arranged, if this is your preference, keeping the monthly payments as low as possible. If this presents a better long-term solution versus renting a property or a long commute, then it is worth pursuing. A typical situation is a flat in or near a city centre, with a main larger home being owned outside of a city. This is a common situation that some banks are understanding of.
There are no additional fees or charges to an additional residential mortgage. However, all mortgages must be factored in for affordability purposes.
Things to consider:
- If you are considering an interest-only mortgage, it is important to understand the risks involved. Interest-only mortgages do not build equity in your home, so you will need to have a plan for how you will repay the loan in full at the end of the term.
- You may be able to let the property on a short-term basis. But would not be able to let the property on an AST.
- It is important to factor in the cost of commuting when making your decision. The cost of commuting can be significant, and it may be more cost-effective to buy a second home near your work.
- There are a number of considerations when taking an interest only mortgage. Please see our page for more information
If you are considering buying a second home due to proximity to work, it is important to speak to a mortgage broker to discuss your options. A mortgage broker can help you to understand the different options available and to find the right mortgage for your needs.
Property for a relative
A common situation we are approached with is the intention to purchase a property to be used by friends and family. While this might not apply to all, if you are a foreign national and expect regular visitors from overseas you may decide to purchase additional residential properties for your own use. Subject to affordability, this is acceptable, and we have been able to assist with up to four residential properties for one client through high street lenders.
While private banks are able to accommodate this situation, if the client is eligible for high street finance, it will usually be a more cost-effective solution. It requires additional work as the underwriters rely heavily on the experience and presentation from a broker. At Orton Financial, this is a process we are experienced in processing.
Things to consider:
- If you are buying a property for a relative, you will need to make sure that the property is suitable for their needs. You will also need to make sure that you are able to afford the mortgage payments.
- If you are buying a property for a relative who is not a UK resident, you will need to check with the lender to see if they will allow you to do this. Some lenders may have restrictions on who they will lend to for this type of purchase.
- If you are buying a property for a relative, you will need to make sure that you have a clear understanding of the tax implications. There may be tax implications for you and for your relative, so it is important to get professional advice.
If you are considering buying a property for a relative, it is important to speak to a mortgage broker to discuss your options. A mortgage broker can help you to understand the different options available and to find the right mortgage for your needs.
For more information on buying a property as a foreign national see our recent article.
Holiday home
If you are intending to purchase a second home to be used as a holiday home, then it would still qualify for a residential mortgage. You will still be eligible to let the property out on a short-term basis if you did want to generate some income, without the need to switch to a more expensive investment mortgage.
It is important to review any local restrictions with relation to short-term letting of a property. For more information on holiday-let residential properties, see our article here.
If you are in a situation where you need to purchase an additional residential property or refinance, contact Orton Financial.
Things to consider:
- If you are buying a holiday home, you will need to make sure that the property is suitable for your needs. You will also need to make sure that you are able to afford the mortgage payments and the costs of running the property.
- If you are buying a holiday home, you will need to check with the local authority to see if there are any restrictions on short-term letting. Some areas have restrictions on how often you can let out your property, or how long you can let it out for.
- If you are buying a holiday home, you will need to make sure that you have a clear understanding of the tax implications. There may be tax implications for you and for the guests who stay at your property, so it is important to get professional advice.
For more information on holiday home mortgages see our recent article.
Want to discuss your options?
If you are considering buying a holiday home, it is important to speak to a mortgage broker to discuss your options. A mortgage broker can help you to understand the different options available and to find the right mortgage for your needs.