Should You Mortgage a Second Home?
Imagine an older couple in their mid-50s with grown children. Their youngest child, now in his late 20s, is looking to buy a home in anticipation of getting married. Dad and mum are considering purchasing a second home and renting it to the children, with the goal of transferring ownership after the kids have paid a certain amount. What they need to know is whether it is wise to mortgage a second home.
Prior to the housing crash of the previous decade, it was relatively common to mortgage a second home. Older people who had already paid off their first mortgages were easily able to get new mortgages to buy additional property. Some did so for reasons similar to what we described above; others purchased additional properties as investments.
That was then; this is now. Things have changed along with new rules introduced as a result of the housing crisis. Even with the resources on paper, it might not be possible to mortgage a second home unless property owners have a significant amount of money to put down as a deposit.
Stricter Mortgage Market Reviews
Much of the blame for the housing crisis was laid at the feet of lenders who were accused of irresponsible lending practices that resulted in people getting mortgages even though they could not truly afford them. To prevent that from happening again, the government instituted what is known as the Mortgage Market Review (MMR). This review requires lenders to do a better job of vetting loan applicants in order to make sure they can afford to borrow.
Loan applicants were vetted prior to the housing crash, but the new rules add some extra requirements. First, lenders need to do a better job verifying current and past income. More importantly, they have to make every attempt to determine whether borrowers will be able to continue making payments should their finances be disrupted in the future. Some have likened this extra requirement to the stress testing banks must undergo periodically.
The difficulty for lenders is that there are no standards for this stress testing. They can look at things such as employment history and personal savings, but that's about it. No one can accurately predict the future. No loan officer can truly guarantee that the borrower will not run into financial trouble. The result is that banks tend to be fairly cautious.
The MMR should not be a hindrance to mortgaging a second home as long as the borrower has a steady employment history and is still relatively young. Things might be different for a borrower who is nearing retirement, though. If our fictional couple were in their early 60s, they would have a much harder time getting a new mortgage.
Stamp Duty and Mortgage Interest
The other thing to consider before you mortgage a second home are the changes to stamp duty and mortgage interest. Purchasing a second home, regardless of the reason, is now subject to higher stamp duty as a result of changes made in 2015. Furthermore, mortgage interest will not be deductible beginning in 2017. That means any income you receive from a second home will be subject to full taxation despite the fact that you are paying interest on your mortgage.
It still might make sense for our fictional couple to mortgage a second home if the numbers add up and they get past the MMR. If not, they may have to look for other ways to finance a purchase. One option would be to downsize and sell their current home to the kids.
Instantly compare 950+ of the UK's best secured loans
Rates from as low as 3.75%