Second Home Mortgage Deposits
A second home purchase with a mortgage typically requires you to have a deposit, find out what down payment you need and how the amount affects the interest rate you secure.
Buying a second home with a mortgage typically requires you to have a deposit. Here, we look at how big a down payment you need to buy an additional property and how the amount affects the interest rate you secure.
We also identify acceptable equity sources and how a broker could help you make your funds go that bit further. Finally, we investigate whether buying an additional property with no deposit at all is possible.
How much deposit do you need to buy a second home?
Lenders perceive mortgages for an additional property as higher risk. That’s due to the corresponding increase in expenditure for customers. As a result, deposit requirements tend to be higher than with mortgages for primary residences.
Typically, at least 15% – 20% is required – though some mortgage lenders will want you to have even more. For example, Harpenden Building Society only offers second home mortgages to clients with a 35% deposit.
Potentially, you could find a provider who will go lower than 15%. They’re uncommon, however, and you’ll need to meet other strict criteria to be eligible. A broker would be able to help you identify providers that may be a suitable option.
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How your deposit amount affects your interest rate
As with standard mortgage applications, a bigger deposit improves your loan-to-value ratio (LTV) making lenders happier to extend you a loan as their risk reduces. Plus, as you become a more attractive applicant with a better LTV, lenders are more likely to offer lower rates too.
You, therefore, not only become eligible for more mortgages when you have a larger deposit, you’ll have access to a wider selection of better rates, making your repayments more affordable.
How a broker can make your deposit funds go further
Buying a second home can be trickier, especially as you need a better LTV than you would usually require for your primary residence.
On your own, it can be tough to find a mortgage provider who always and definitely will accept all of your deposit from your particular source. Yet, it’s crucial to find a lender that does as it will bolster your equity amount and thus improve your LTV. Improving your LTV is key to securing the lowest rate possible and minimising the interest you have to repay.
A broker can identify the lenders that accept all of your deposit and that are suitable for your needs. Using a broker’s expertise and market knowledge can help you access a loan at your first application – reducing your stress and any negative impact on your credit score too.
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Where can your deposit come from?
There are several sources that providers accept as deposit for second-home mortgages.
Generally accepted sources could be:
- Equity from your primary home. You can usually remortgage your residence to release funds for a deposit on a second home. Similarly, sometimes lenders accept funds raised from a mortgage of an additional property you may own such as a buy-to-let.
- Loan or gift from close relatives or friends. Immediate family or friends could give you the equity to purchase another home.
- Concessionary purchase. If a seller accepts a price below the true market value of a property, sometimes lenders are happy to use the difference as equity.
- Gift from an occupier not named on the mortgage. This type of situation occurs if a couple or two friends want to buy a property together. While only one of them is named on the mortgage, the other is funding the deposit.
- Redundancy payment. Lump sums from a layoff can sometimes be used.
Sources that can often prove trickier to bolster deposits (though sometimes can be acceptable) are:
Equity which originated outside the EEA. Lenders may require funds to have come from inside the European Economic Area.
Builders deposits. Developers of new homes often offer deposit help to incentivise customers to buy one of their properties. Not all lenders like this form of equity, however.
Equity loan or unsecured loans. The majority of lenders won’t allow these types of loan to be used as a form of deposit on a second home.
Cryptocurrency. Mortgages secured against cryptocurrencies like Bitcoin are still rare in the UK.
Due to the variations in acceptable deposit sources, this is where a broker can prove invaluable. They can suggest providers who do accept your deposit source. As a result, your LTV improves so that you can access better rates and terms.
Can you buy a second home with no deposit?
Technically it can be done by making use of a guarantor mortgage. These are a specific type of mortgage product and could help you purchase another property even though you don’t have a deposit.
They work by a friend or relative ‘guaranteeing’ your mortgage. They do that by either putting their own home up as security or giving you a lump sum in a savings account that your mortgage lender holds. Your friend or relative would not be able to take money out of that account until you have repaid your entire second mortgage.
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Get matched with a broker experienced in second home mortgages
Buying a second home can be complicated, so it’s a good idea to seek advice from an expert. Using a broker can help improve your chances of being approved the first time (so your credit score is not affected), but brokers can also help identify products with the lowest interest rate possible with your LTV ratio. They can therefore help save you money, while also ensuring you can borrow the maximum amount you require.
We offer a free, no-obligation broker matching service where we connect you with an expert in second home mortgages. Get in touch with us today, or call us on 0808 189 2301, so they can help you maximise your deposit’s potential.
They can be. If you are simply selling your first property to buy for the second time, you will usually find that you need a deposit of at least 10%. If you’re buying a second property, in addition to your primary residence, lenders will view these mortgages as slightly higher risk. They will generally like customers to have a higher deposit.
This scheme is for first-time buyers only. If you’re buying a first home, it can potentially be used to bolster your deposit. It can’t be used to increase equity for a second home. A broker would be able to explain all your options fully.
Irish citizens usually need a 10% deposit for their first home, 20% if they are buying a second home or owned property before and a 30% deposit for a buy-to-let. Speaking with a local broker is your best bet to understand the Irish property market and deposit requirements, as the eligibility criteria can vary from UK mortgage providers.
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