Second Mortgage For Buy-To-Let Properties

What Is a Second Mortgage for Buy-to-Let Properties?

A second mortgage for buy-to-let properties is an additional loan secured on a rental property with an existing mortgage. It allows landlords to access the equity in their property to fund expenses, such as property renovations, expansions, or the purchase of new investment properties, without disturbing the primary mortgage. 

This type of loan can be beneficial for expanding a property portfolio or increasing rental income.

How Does A Second Mortgage Work For Landlords?

A second mortgage allows landlords to borrow against the equity in an existing buy-to-let property. 

Landlords can use this additional loan to renovate the property to increase rental income, purchase another rental property, or consolidate debts related to their rental business. 

Unlike remortgaging, a second mortgage doesn’t interfere with the first mortgage’s terms. However, it does mean having two loans to repay, so landlords should carefully consider the potential return versus the additional financial commitment.

The lender holding the first mortgage is often required to consent for the second mortgage company to register a second charge against the property. This is usually a formality, and obtaining consent takes approximately 14 days.

Mortgage interest rates on buy-to-let second mortgages are higher than those on residential second mortgages because of the increased risk of non-payment. 

The non-payment could be as a result of a tenant unexpectedly leaving, or the property requiring essential works before it can be let out.

Benefits Of A Second Mortgage For Buy-to-Let Investors

• Access to Capital: Owners can use the equity in an existing property to fund new investments or renovations, increasing rental value. 
• It’s a good alternative to taking out an unsecured loan because you can generally borrow more with a second mortgage. However, it needs to be noted that the lender can repossess your property if you don't keep up repayments. If you can see that you are going to struggle making the mortgage repayments, it might be a good idea to try and sell the property before the lender takes repossession.
• Portfolio Expansion: A second mortgage can help finance an investment strategy to purchase of additional rental properties.
• Retain Existing Mortgage Terms: Unlike a remortgage, a second mortgage allows investors to keep favourable terms on their primary loan. For someone who took out a buy-to-let mortgage, say five years ago, it’s likely that keeping that mortgage is in their interest.

Eligibility Criteria: Can You Qualify For A Second Mortgage?

• Credit Score: A strong credit history improves eligibility. You can quickly obtain a credit report from one of the three leading UK credit reference agencies: Equifax, Experian, or TransUnion. The report will confirm your credit score and provide a loan, mortgage, and credit card repayment history.
• Equity in the Property: Second mortgage elgibility means the more equity you have, the larger the loan amount you may be able to borrow. Also, the more equity you have, the lower interest rate you will pay. 
• Rental Income: Rental income from the property should ideally cover mortgage payments. If there is a shortfall between the monthly rental income and the mortgage repayments, some lenders allow you to use other income when assessing affordability. Mortgage rates for property investment loans are higher than residential mortgage rates.
• Debt-to-Income Ratio: A manageable debt load increases your chances of approval. The bigger the surplus between the rent you receive and the mortgage repayment you make, the stronger your application for rental property loans.
• Lender-Specific Criteria: Some lenders require a minimum ownership period or are specific about the type of property you can offer as security. Some lenders do not give loans for holiday homes. They may also lower the loan amount for ex-local authority flats.

How to Apply for a Second Mortgage on a Rental Property

You should seek the services of a qualified mortgage broker to ensure that you get the best possible deal when financing a buy-to-let property. While there is a much greater choice of residential mortgages, most brokers will have access to a large number of buy-to-let financing products.

Most lenders that offer second charges on buy-to-let real estate only offer their products through reputable brokers. Any broker you approach should be authorised and regulated by the Financial Conduct Authority. 

In addition, a good broker will have access to several lenders who offer second mortgages to ensure that they can offer you the most competitive mortgage deal available.

If you see a good investment opportunity and want to buy properties a broker will assess your financial situation and look at options including mortgages with variable rates and fixed rates.

If you have decided that you want to buy an investment property it is essential that you start the application process at the earliest opportunity. While many brokers might think that they can arrange a second charge buy-to-let loan in four weeks, the actual process can take considerably longer. A couple of factors include:

1. Will the lender be prepared to use an automated valuation to assess the equity in your broker. The less the amount you are wanting to borrow against the value of the property, the greater chance that a lender may accept an automated valuation. This would avoid the requirement for a full internal valuation of the proposed property. Not only is an internal valuation considerably more expensive, but also means the process takes a lot longer. Trying to get a valuer to value a property in the peak holiday season can add say 4 weeks to the completion process.
2. Does the proposed second mortgagee lender need to obtain consent from the current mortgage lender? You often need to let the current lender know how much is being raised, the interest rate, the monthly loan repayment and what the loan monies are being used for. Lenders typically take 2 weeks to respond for a request to consent.

Other considerations:

1. Assess Your Finances: Ensure your credit score, rental income, and debt levels meet the requirements of the mortgage lender. 
2. Evaluate Equity: Determine how much equity is available in your property for borrowing. You can get an idea of the equity in your property by looking at the sold prices on Rightmove. You can see properties sold on your street and nearby properties comparable in size and location. Ultimately, to assess your property's exact equity, a lender may insist on a formal valuation of your property. Some lenders may work out the equity using an automated valuation.
3. Research Lenders: Some lenders specialise in buy-to-let second mortgages; compare their terms and rates. Specialist brokers will access to software that allows them to source the most flexible buy-to-let mortgage to suit your circumstances.
4. Prepare Documentation: Gather proof of income, rental agreements, and property valuations.