The Attraction of Second Home Mortgages
Many people have a well-founded faith in the security of investing in “bricks and mortar”. For many of those investors, therefore, if there is one thing better than owning their own home, it is often the attraction of owning not just the one, but two homes. Moreover, when it comes to second home mortgages, existing mortgage borrowers – who have demonstrated their ability to maintain repayments on their first home – might frequently find it relatively easier to raise the funds for the purchase of a second home.
Remortgaging
Over the years, many homeowners will have seen the value of the home in which they live increase significantly in value, whilst at the same time they have also made considerable inroads in repaying any outstanding mortgage on that home. The equity represented in such ownership, therefore, might be extremely valuable. For many such homeowners, however, that equity lies locked in to the bricks and mortar of their home.
Releasing that equity through remortgaging the principal home can provide a route to raising the funds required to buy a second home (either as a source of rental income and an investment in its own right, or as a holiday home for use by the owners or their family and friends). As a single, new form of borrowing, a remortgage may prove more cost effective than maintaining the existing mortgage on the principal home and seeking a separate mortgage for the purchase of the proposed second home.
As the homeowner will already be aware, however, defaulting on the mortgage repayments can lead to the loss (through repossession) of the home itself. A second home bought on the proceeds of a remortgage, therefore, can leave both properties vulnerable to repossession in the event of defaulting on the repayments.
Second home mortgages
If the homeowner is unable or unwilling to remortgage the principal residence, however, there exists the alternative route of raising a new, separate mortgage on the proposed second home. On occasions, this might prove a more difficult course to pursue and the chances of success will, of course, depend on the prospective borrower’s level of income and the size of deposit that is available.
The possible exception is where the second home is intended as an investment from which a regular rental income is anticipated. In other words, the property will serve as the principal asset of a business venture, the profits from which will be generated in the form of rent from tenants. In this case, the borrower will typically approach a mortgage lender specialising in commercial loans. The criteria for approving the application for such a mortgage is then likely to turn on the lender’s assessment of the commercial viability of the proposed business – the level of profit likely to be generated from rental income.
As noted, second home mortgages advanced on a commercial basis are more often than not arranged by specialist mortgage providers. Furthermore, many high street banks and building societies rely on a limited range of such commercial providers. By using the services of a specialist mortgage broker, however, the prospective borrower might gain access to a considerably wider range of potential lenders.
Sean Horton is a Director of Enhanced Wealth, a whole of market mortgage broker in Kent specialising in second home mortgages and commercial finance.
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