Whether you want to buy a holiday home, a second residential property, or invest in the buy-to-let market for extra income, getting a second mortgage is a big commitment that you should carefully assess beforehand. Buying a second property is attractive, especially in today’s real estate market, where prices have soared, promising significant return on investments. You can let out your second property or sell it in the future for profits. Read more about estate planning in this article.
But qualifying for a second mortgage can be more challenging than a first mortgage, especially when you are still paying the first one. Here are some points to assess when considering a second mortgage.
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You May Need a Large Deposit.
Mortgage lenders perceive second mortgages as a bigger risk because you already have a commitment to pay the first mortgage. But they cover this risk by requiring you to have a large enough deposit for your second property purchase.
Expect many lenders to require at least 25% as the minimum deposit. It may be more depending on your credit history and existing debt commitments.
Your Credit Report
Mortgage lenders are stricter when assessing applicants for second mortgages; therefore, any red flag in your credit report can negatively impact your eligibility. You should carefully check your credit report beforehand, and any other information lenders use to assess your credibility and highlight the red flags. Then take the right steps to eliminate them, for instance, adding some notes on why the negative marks are on your credit report. Alternatively, you can look for a lender whose criterion accommodates your circumstances.
When seeking a second mortgage, your income should be high enough to sustain it, and it should cover the costs of owning a second home while still repaying the first mortgage. You should also factor in maintenance expenses, and you can evaluate yourself and see how owning a second home may impact your lifestyle and plans. That also gives you a clear idea of the properties within your budget that you can consider. Being realistic about your financial standing also gives you the confidence to seek a loan.
Stamp Duty Costs
Remember that you are in for a higher rate of stamp duty when buying a second property, an aspect you need to assess beforehand. When you finish purchasing a second property, you have 14days to file a return and pay the due stamp duty. Usually, you can expect to pay an additional 3% on the standard stamp duty when buying a second property.
You may also be liable for other taxes depending on how you intend to use the second property. For instance, you will be required to pay income tax if you let it out as a holiday home or capital gains tax if you sell the property. Therefore understanding your tax position early can help you make an informed choice.
Ensure you conduct your due diligence and carefully scrutinize your financial position before seeking a second mortgage. Doing that ensures you do not make costly mistakes that will impact your investment in the future.