There are a number of ways of providing financially for your retirement. Typically, of course, this involves the capital appreciation in the value of an investment which, in many cases, also provides a more or less steady income stream. For some people, second property mortgages may represent just such a way of funding their likely needs when it comes to the time to retire.
In this context, it is the “second property” that is the operative description because it refers to a property other than your principal home, irrespective of whether there is an outstanding mortgage on that main residence – it’s the second property, in other words, and not the second mortgage that is being described.
The principle of owning a second property, which you hope gains in value over the years and which might also provide a steady income stream in the meantime, holds true for almost any type of dwelling in which you choose to invest.
Nevertheless, there are a few subtle differences, depending on the purpose to which the property is put, that might influence your approach to second property mortgages.
Holiday homes
It might be that you want a home in which you, your friends and your family are able to take holidays from the moment of purchase. As you reach retirement age, then, you have the option of choosing the former holiday home in which to retire, whilst living off the proceeds from the sale of your current residence; alternatively, you might decide to sell the holiday home – especially if it has significantly increased in market value – thus realising the increased worth of your investment.
Provided the holiday home is largely used in this way and not as a source of generating regular income from holiday lets, the property is unlikely to be classed as a business asset for tax purposes.
By the same token, mortgage lenders also typically differentiate between a holiday home used mainly by yourself and your friends and family and a business run on the basis of regular income from lettings. In the former case, the second property mortgage is likely to be considered in the light of your currently earned income, your outgoings and other assets; in the latter case, the mortgage lender is likely to show much greater interest in the rental income you expect to generate from your holiday letting business.
Buying to let
The purchase of a property as a straight forward business investment – in which you anticipate an increase in value of the property over time and a steady income from rents collected from tenants – is more clearly a case for a buy to let mortgage.
Second property mortgages raised with this objective specifically in mind are considered in the light of the anticipated success of the lettings business. In other words, the mortgage lender expects to be persuaded that sufficient rental income is going to be generated both to cover the mortgage repayments and the maintenance and management costs of letting the property. In terms of the security offered in respect of the mortgage, this might be in the shape of the borrower’s existing home or the property that is being bought to let.
By: Sean Horton