At Goldman Read, we are often approached by people looking to buy a second home. There are various reasons behind this, some wish to have a bolthole by the sea or in the country that they can head to at weekends.
Others want to buy a property that they can let on a short term basis for holiday lets. Some people would like to have a combination of both of these. To take each of these in turn.
Are mortgages available for second homes for owner occupation?
When assessing a second residential mortgage lenders will want to find out the purpose of the loan i.e. it may be a city residence for someone who commutes long distances and would prefer to live and work in the City during the week and return only at the weekends to the main home where there family live.
This is becoming increasingly popular as peoples’ working lives become more flexible and they are not chained to a desk 5 days a week. There are obvious social and familial advantages to wanting your family to live in the countryside or by the sea or in a “greener” environment where the schools may be better, it is not so crowded, its safer and there is more room to breathe.
It can also work the other way. People who may have moved out to the countryside/ seaside may decide that they want to have a place in the City to enable them to take advantage of the obvious social and cultural advantages that the City represents.
Other people wish to have somewhere they can escape to after the working week has ended. Improving transport infrastructure means that it doesn’t take long to get out of the City.
Generally when lenders are assessing the loan they want to ensure that it is affordable in exactly the same way as any other residential mortgage. The main factor to consider here is the amount outstanding on any existing mortgage.
This can make the new residential loan simply unaffordable.
Lenders may also impose stricter Loan to Value (LTV) restrictions on the second property i.e. a 25% deposit may be required. So you would need to find a bigger deposit than the norm. Lenders do differ on this and there are those that will consider 90% LTV.
There may also be restrictions on the repayment methods allowed with second home mortgages i.e. interest only may be restricted.
Finally lenders will want to know about the security, the property itself. Some second home holiday developments are leasehold houses with certain fixed service/management charges and restrictions on how the property will be used.
Most lenders will not consider lending on this type of property.
How are Holiday lets assessed?
These are becoming increasingly popular due to the increase in “staycations” and the seemingly warmer summers we are enjoying in the UK.
Figures show the UK holidays are growing each year with 59 million nights in 2017.
Unlike recent tax changes to standard buy to lets Holiday lets are still very much regarded as a business and this means they are treated more favorably when it comes to the taxation of rental income and also wear and tear if the property is fully furnished.
(Disclaimer -we are not tax advisers and its always good to check your own specific tax position with an accountant).
The way lenders assess holiday lets is similar to the way they will assess standard buy to lets so it very much depends on the expected rental income of the property. In addition to a valuers assessment of rental they will also normally ask for a holiday rental company to provide something in writing indicating how much the property is likely to rent for.
Lender are looking for somewhere in the region of 7-8% as a gross yield based on the mortgage amount being borrowed.
When assessing the rental income on a holiday let its important to factor in that the property may only let during particular times i.e. the summer season and Christmas and New Year, depending on the location of the property.
The rental income during these periods may seem particularly attractive during these times but its important to consider the overall average rent.
There are also other things to consider, you would remain responsible for all of the bills on the property which will eat into your profit margin. Additionally you will have to furnish the property and it will be subject to a much great level of wear and tear as such is the nature of short term lets.
These types of property require much closer management than standard buy to lets and if you are using an agent to fully manage the property for you you are looking at management fees north of 17%.
Holiday let and residential use
Here are lenders who will allow you to have a mortgage which allows you to both rent out the property and use it yourself as and when you decide.
We recently had clients who were wanting to purchase a property for exactly the above purposes. They had family who lived in the Lake District and previously every time they visited they had to make arrangements with other family members to stay with them which as a large family was not always convenient or desirable.
Instead they arranged to buy a property in a location they knew well and which they knew could be easily rented. They thus solved their own problems as well as gaining an asset which is now a strong income earner.
Thinking of refurbishing? Read our blog about how refurbishment mortgages work now.