Almas Uddin
Founder and Mortgage Advisor
29 Feb 2024
Using a Second Charge Mortgage on Buy-to-Let Investments
It is certainly possible to apply for a second charge mortgage on buy-to-let investment properties, although it is important to calculate the costs carefully and ensure any second charge mortgage providers you choose are likely to be able to approve your application.
Some applicants may also find that applying for a second charge mortgage buy-to-let is more complex than applying for other purposes because 2nd charge mortgage providers may wish to review the viability of the investment based on the anticipated rental yield.
Further, if the second charge mortgage is secured against a residential property, you must ensure any second charge mortgage buy-to-let financing is offered by a lender with suitable second charge mortgage regulation compliance since funding secured against your home needs to be provided by an authorised and regulated mortgage brokers.
Applying for Second Charge Loans on Buy-to-Lets
Purchasing a second property as a rental investment is a growing trend, and a second charge mortgage buy-to-let product is one possible way to raise the financing needed for the deposit or to purchase a rental property outright.
There are various pros and cons, but one benefit of second charge loans on buy-to-lets is that, provided you have a property with plenty of equity, you should be able to borrow through a second charge mortgage fairly easily.
In essence, the product is the same as any other second charge mortgage, where you use equity as security for the loan, either using your primary home or another property asset as security. It is important to remember that if you use your home for second charge loans on buy-to-lets, your property is at risk of repossession if you do not keep up with the repayments.
A second charge mortgage buy-to-let deal is also different from a second mortgage because the 'second charge' means the new mortgage is secured against the same property against which your first mortgage is already secured.
However, in many cases, a second charge mortgage buy-to-let product is called a second mortgage interchangeably, although it means something a little different from a completely separate second mortgage against an alternative property.
Taking Out a Second Charge Mortgage on Buy-to-Let Acquisitions
Second charge loans on buy-to-lets can be secured either against your residential home or a rental property itself, where another buy-to-let with sufficient equity can provide the security – but the terms may differ because second charge mortgage regulation does not apply to commercially owned properties in the same way.
There are also fewer 2nd charge mortgage providers who offer second charge loans on buy-to-lets, so it is more important to consult a broker to ensure you carefully analyse any potential products and lenders to avoid paying more than necessary.
Second charge mortgage regulation applies when you opt for a second charge mortgage on buy-to-let properties when the home is rented to a family member, called a regulated buy-to-let. This scenario can be much harder if you’d like to apply for a second charge mortgage interest-only, although some niche lenders may be able to help.
Affordability on Second Charge Mortgage on Buy-to-Let Applications
Lenders use a different assessment process when deciding whether an applicant passes their affordability requirements for second charge loans on buy-to-lets. That is because, rather than simply the property value, the lender needs to know the projected rental yield and whether that will comfortably cover second charge mortgage interest-only repayments.
Other assessments also apply, considering your income, outgoings, credit score, equity ownership and other relevant debts.
It is up to the 2nd charge mortgage providers you apply with to decide whether they believe you pass their affordability assessments, so understanding their policies and criteria beforehand can be very helpful in avoiding rejected applications or having numerous credit searches on your file.
If you are turned down for a second charge mortgage buy-to-let financing application, you have several options depending on the reason. For example, you may find that some 2nd charge mortgage providers refuse any applicant with adverse credit. In contrast, others are more interested in whether you can prove your ability to keep up with the repayments.
Applications for Second Charge Loans on Buy-to-Lets
Alongside using a second charge mortgage on a residential or rental property to raise finances to buy another portfolio residence, you can also use a second charge mortgage on buy-to-let properties for other reasons, such as:
- Debt consolidation
- Buying a new vehicle
- Covering medical or education expenses
- Supporting a family member with a deposit
- Purchasing a holiday home
While landlords are likely more familiar with a second charge mortgage on buy-to-let properties to purchase another residence, they will consider a broad range of purposes, provided you have the equity and affordability to manage two sets of mortgage repayments.
The difficulty may be that if you intend to use a second charge mortgage buy-to-let to raise a deposit and then take out a separate buy-to-let mortgage to pay the balance, many lenders will be reluctant to approve the new mortgage – as it would mean having three mortgages: a first charge, second charge and separate mortgage.
Another option, equity depending, would be to use a second charge mortgage buy-to-let to raise sufficient financing to buy another portfolio property outright or to apply for a residential second charge mortgage interest-only on your main home to fund the balance.
In all of these circumstances, it is crucial you understand the total costs and monthly repayments and are confident you have the sustainable income to keep pace with the amounts owing to avoid falling into arrears.
Pros and Cons of Second Charge Loans on Buy-to-Lets
As we’ve discovered, taking out a second charge mortgage on buy-to-let properties can be advantageous, but there are also downsides, and while accessing credit through second charge loans on buy-to-lets is an option, it may also carry risks.
Second charge mortgage interest-only products cost less to repay per month. Still, the capital balance remains unpaid, so you will normally need to present an exit strategy showing the lender how you plan to repay the debt – factoring in your other mortgage borrowing.
It is, though, possible to remortgage a second charge mortgage buy-to-let product. However, the fees associated with remortgaging should be included in the calculations, and it is more complex to remortgage a second charge mortgage on buy-to-let properties than to remortgage a normal first charge loan.
FAQs
What Is a Second Charge Mortgage on Buy-to-Let Property?
Second charge mortgages mean applying for a separate, additional mortgage as well as the first charge mortgage already used to purchase the property. Second charge loans on buy-to-lets work the same way, although the lender’s affordability assessments will factor in the projected rental yield if you are securing the second mortgage on a rental property.
Can I Use a Second Charge Mortgage Buy-to-Let?
Yes, you can apply to 2nd charge mortgage providers for a second charge mortgage either secured against your residential home to finance a buy-to-let investment or against a buy-to-let property you own to raise money for the same purpose.
How Does a Second Charge Mortgage Interest-Only Work?
Interest-only mortgages are common in buy-to-let borrowing since they reduce the monthly value payable and make it easier to pass affordability assessments since the rental profits are more likely to cover the interest cost than the interest plus capital on a repayment mortgage.
This same principle applies to second charge mortgage interest-only products – the lender will need your exit strategy to demonstrate how you plan to pay back the original borrowed value at the end of the term.
What Are the Second Charge Mortgage Regulation Standards?
Second charge mortgages secured against residential homes are subject to FCA regulation and consumer protections like all other residential borrowing products. Commercial second charge loans on buy-to-lets are not regulated in the same way, although 2nd charge mortgage providers will still need to run through affordability and eligibility assessments.
What Are Second Charge Mortgages in the Buy-to-Let Market?
Second charge mortgage buy-to-let products are additional mortgages secured against rental property assets alongside the original first charge mortgage – usually a standard buy-to-let mortgage.
How Can I Find the Best 2nd Charge Mortgage Providers?
The most suitable second charge mortgage buy-to-let will depend on a thorough assessment of your requirements, the property you wish to use as security, the valuation or rental yield of that property (depending on whether it is your home or a rental asset) and numerous other factors such as your income, credit score and equity ownership.
We advise all borrowers looking for the most competitive second charge loans on buy-to-lets to get in touch since a whole-of-market independent broker can provide tailored suggestions and recommend lenders you are unlikely to find when relying on comparison sites.
Can I Apply for Second Charge Loans on Buy-to-Lets?
If you have a property with sufficient equity and otherwise are eligible for a second charge mortgage and can afford the repayments on both loans, you should be able to apply for a second charge mortgage buy-to-let product. Please contact Revolution Finance Brokers at your convenience if you would like to get started.
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