Second Charge Buy-to-Let Mortgages
Buy-to-let landlords may sometimes need urgent access to their equity within buy-to-let properties or perhaps they want to expand their buy-to-let property portfolios or need revenue for important renovation work.
Although there are several methods to release these funds, many take time and could incur early repayment charges, so they search for more immediate solutions. In these cases, the best option available to landlords is a second-charge buy-to-let mortgage.
In this article, we’ll delve deeper into the second-charge buy-to-let mortgage option and how it can assist buy-to-let landlords in accessing equity from their existing mortgages for their buy-to-let (BTL) properties in a quicker turnover time than the other available methods.
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Second-Charge Mortgages Explained
Second-charge mortgages are loans secured on a property but differ from a residential mortgage that’s in place to buy a property. Approval of this second-charge loan will depend on the available equity on your property, which could face repossession if not paid. Falling behind on repayments means a lender could sell your home to recoup any outstanding debt.
People often mention a second-charge mortgage as a second mortgage, but it should be differentiated from just a second mortgage to purchase a property. A second-charge mortgage is actually a supplementary loan on an already-mortgaged property.
Second-charge mortgages in buy-to-let contexts
Many lenders make second-charge loans available to landlords of buy-to-let properties, with your rental yield determining the amount you can borrow.
Borrowers will more commonly take out second-charge loans against residential mortgages. Still, it is not uncommon for mortgage lenders to grant second-charge mortgages on buy-to-let properties leased to tenants. In a buy-to-let context, a landlord could use second-charge mortgages to fund other investment properties within their property portfolio.
Can You Get a Second-Charge Mortgage on a Buy-to-Let Property?
You most certainly can get a second-charge mortgage on a buy-to-let property, but how easy it is will depend entirely on your personal circumstances as a landlord. Lenders will look at the types of property you possess, your total rental yields and other income, whether you have good or bad credit and the loan-to-value ratio on your properties.
Second-charge mortgage lenders will consider sole traders, public and private limited companies, limited liability partnerships and independent people for second-charge mortgages, but each lender will have its criteria that applicants need to meet to qualify.
Can you get a second-charge mortgage if you rent to your immediate family?
In mortgage terms, when you rent to an immediate family member or members, the property you’re renting is known as a regulated buy-to-let property. In these situations, getting approval for second-charge loans is generally a lot more challenging, but specific lenders will consider this type of second-charge mortgage application.
You may have a lesser choice of willing lenders with a regulated buy-to-let property, and those who are keen might be extra wary if you or your immediate family have once lived in the home. The lender will likely ask you for proof of residency under these conditions.
If you are uncertain of the stipulations and how to proceed, you should contact an online mortgage advisor through Loan Corp or another mortgage expert.
How Does a Second-Charge Mortgage Work with Buy-to-Let Property?
A second-charge mortgage is essentially just a loan granted on the available capital or equity in your buy-to-let property. You calculate this equity by subtracting the outstanding existing mortgage amount from the market value of your buy-to-let property.
To qualify for a second-charge mortgage, you’ll need to show that the equity you’ve built up through your rental income combined with the available investment property equity is sufficient to cover the amount of a second-charge loan. A lender will also need to know you’ll be able to meet the repayments of the loan and your other mortgages combined.
A second charge mortgage is also known as a second charge loan or just a second mortgage (although it’s not to be confused with a mortgage for a second home). To qualify, you’ll have to demonstrate how much equity you have built up with the help of your rental income and that you can afford to meet the repayments on both mortgages.
It’s important to note that you don’t have to approach your current lender for a second-charge mortgage, although you might need permission from your existing buy-to-rent lender before committing to a second-charge mortgage. It can be complicated, so it’s best to visit a mortgage broker or at least speak to an online mortgage advisor to examine your options in the market.
Affordability for Second-Charge Buy-to-Let Mortgages
A lender’s assessment of your affordability for a second-charge loan on a buy-to-let mortgage entails somewhat more than a typical residential mortgage assessment would, as your predicted future rental incomes and BTL properties equity also requires factoring into the calculation.
The assessment will include more routine background checks into your affordability and circumstances, as would be the case for a standard residential mortgage. These checks would consist of the following:-
- your credit score
- your income
- your current and future debt
- your outstanding first-charge mortgages
- your property portfolio, including the types of property
- your personal circumstances, including your age and other personal income, etc.
The length of the second-charge loan term will also get factored into the affordability calculation, as your monthly repayments will decrease if the loan period is longer. The lender will also include the expected income from any new buy-to-let rental for which you might require the second-charge loan.
The term length of the second charge mortgage will also affect affordability—the longer the loan, the less you will pay monthly, but the more you will end up paying back to a lender overall.
Types of property that could affect the approval chances of a second-charge application
Certain types of buy-to-let properties can hinder your chances of having a second-charge mortgage approved. Certain lenders will not consider applications for specific property types, while others might only approve them based on a minimum property value or a maximum loan-to-value percentage. The following property types can be problematic:-
- Non-standard construction homes
- Uninhabited properties
- Ex-council properties
- Flats within commercial properties
- Regulated buy-to-let properties
- HMO properties
- Semi-commercial properties
Lenders may also restrict applications if tenants have joint or several liability attached, which refers to court-used liability systems used to allot responsibility for tort cases involving many negligent parties. They may also place restrictions on the size and number of bedrooms on a specific property.
Why Would a Mortgage Company Refuse a Second-Charge Mortgages for Buy-to-Let?
A mortgage company will refuse an application for a second-charge loan if the borrower fails to meet the lender’s affordability criteria. If you get rejected for a second-charge loan, it might be wise to borrow less by utilising one of the many other loan options available.
A lender could reject your application if your credit rating is poor or if you have bad credit. If you’re able to show, even with an unappealing credit score, that you can afford the second-charge repayments, you could still stand a chance of being approved for the loan. With bad credit involved, higher interest rates or a restrictive borrowing cap will likely accompany any approval.
Types of Second-Charge Mortgages Available for Buy-to-Let Properties
Two different types of second-charge mortgage options are available to BTL landlords. Depending on your affordability and circumstances, a mortgage broker will suggest one of the following alternatives:-
A fixed-rate second-charge mortgage
This type of second-charge mortgage, like any other fixed-rate loan, will offer a fixed rate of interest over an agreed introductory period, which is usually five to seven years. Unless you refinance after this initial period, your loan will adopt a variable interest rate thereafter.
Lenders will generally offer this type of capital repayment second-charge mortgage to borrowers who require a long-term mortgage of over 20 years, making it viable from a monthly repayment perspective.
An interest-only second-charge mortgage
An interest-only second-charge mortgage means you will only repay the interest, not the capital, for an initial fixed period, like five years. After that, a lender will require you to repay the outstanding loan balance, including interest, by a stipulated date.
If you’re a BTL landlord looking to refinance through a plan with more favorable terms, sell your property, or pay off the borrowed capital you borrowed with investment property income, then an interest-only loan would make sense to consider.
Second-charge mortgage-type summary
With a capital repayment fixed-term mortgage, you repay both a portion of your capital borrowing and the agreed interest monthly. Hence, your owed amount will decrease as you move further into the repayment period, and you will have fully paid the second-charge mortgage by the end of the payment term.
An interest-only loan means you will still need to pay off the loan balance and further interest after the initial agreed-upon interest-only term expires.
Using a Second-Charge Mortgage to Buy an Investment Property
As a BTL landlord, you can use a second-charge mortgage approved on a buy-to-let or residential property to purchase a different investment property. You can use the second-charge loan to assist your purchase of an investment property in its entirety or use it to grow your deposit for a buy-to-let mortgage.
The latter option may present some problems, though, as you would need to declare any second-charge borrowing with your BTL mortgage application which means it would form part of your affordability analysis.
Other reasons to take a second-charge mortgage
There are several reasons why homeowners would consider a second-charge mortgage a viable borrowing option, the most common being for home improvements or debt consolidation. Some other popular reasons include paying for education or a new vehicle, settling medical expenses and assisting with family-related money problems.
FAQs
To qualify for a second-charge mortgage, how many BTL properties must I own?
As long as you own a single BTL property, you can qualify, but some lenders will place a cap on the maximum number of properties you can own.
Is it possible to remortgage second-charge mortgages?
You can remortgage to secure a better deal, but additional fees might make the option less beneficial. It is not as easy to refinance second-charge mortgages as it is with first-charge mortgages.
Is a further advance the same as a second-charge?
A further advance enables you to borrow additional monies from your mortgage lender on similar or different terms, whereas a second-charge is a separate loan altogether.
Conclusion
Second-charge mortgages are practical and time-saving ways to release equity from buy-to-let properties, but it’s good to know whether the process and options are most suitable for your individual needs.
Like any property purchase and the available connected mortgage options, criteria can differ substantially from lender to lender. Getting in touch with a professional and reliable expert team to assist you should be a prerequisite.
At Loan Corp, we offer our prospective clients a no-obligation chat, including some targeted advice designed to ensure you can make the most informed call regarding your available options, so feel free to contact us or call us on 0808 301 9509 as soon as you need assistance.