Some people looking to buy a second home for either their own leisure or to possibly resell in the future will look into mortgaging that home as well. Many wonder if this is even possible, can you pull out a new mortgage for another home? The answer is yes, you can. However, there are a few things to understand.
Second Homes and Mortgages
When getting any loan, including a mortgage, the lender will calculate your credit score and will also look at your debt. If you already have a mortgage on one home, keep in mind that every dollar owed on that mortgage counts towards you being in debt. This debt ratio weighs heavily in the lender’s calculations. What that means is, even if you can handle the payments of this mortgage perfectly fine, the interest rate will be considerably higher.
If the interest rate and payment plan is manageable and beneficial for your plans, then by all means look into getting that mortgage and the second home. It is difficult for most people to be able to do something like this due to the high costs of mortgages, but some people can definitely handle it.
Another possibility is to use the equity on your current home instead. If you own a good chunk of the equity on your current home, you should consider looking into a home equity loan or line of credit. These forms of loans against the home are essentially a 2nd mortgage on your first home and the interest rates are fairly low. This is a much advised option if you have ownership of a good amount of equity in your home.
Buying a second home and mortgaging it in addition to your first mortgage is definitely possible. But, especially in this case, it is extremely important to look into all options available since it gets trickier the second time around and the interest rates are bound to be higher. Still, over 30 percent of home purchases over the last three years have been second homes, so it can certainly be done.
By: Sergio Haros
Posts Tagged ‘People’
Second Property Mortgages – Providing a Comfortable Retirement
February 6th, 2010
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