Extract from the Independent on Sunday (Sunday, 22 May 2011)
A second home need not be just a distant dream
There are mortgages out there, but you need to clarify why you want to buy, writes Alison Shepherd
Sunday, 22 May 2011
Among the gloom of the housing market one small beacon continues to shine: the second home sector grew again last year, rising marginally on 2009's strong performance, according to the latest data from estate agents Knight Frank.
The rise means there are now 245,750 homes across England that have been brought as holiday homes or lets. And although the increase was just 500 or so properties, Liam Bailey, the head of residential research at Knight Frank, says it proves that the 2.6 per cent growth in 2009 was not an aberration.
The increase also confirms that despite all the concerns about the mortgage market, financing a second home is still possible, whether you fancy joining second homers in UK hotspots such as Berwick-upon-Tweed, the South West or Norfolk, or have set your sights on Europe and beyond.
"The second home market keeps expanding, which points to the fact that lenders are targeting affluent borrowers. If you are in the market for a second home, the banks are more than happy to do business with you," says Mr Bailey.
Before you can consider what type of financing you need you have to know exactly how you want to use your second home, according to David Hollingworth, of London & Country Mortgages. Will it be exclusively for family, occasional high-season lettings or all-year round lettings where you can sneak an odd week or two?
"If you're thinking of a buy-to-let mortgage, most lenders will not allow you or your close family to live in the property, and it needs to be rented as an assured tenancy, which means in at least six-month blocks."
But, he adds, it is worth checking with lenders their exact criteria as some can be more flexible. "Scottish Widows and Nationwide have been known within their buy-to-let products to swallow casual letting to family or friends for a couple of weeks a year."
Buy-to-let mortgages tend to come with interest rates 1.5 per cent higher than standard. They also generally have bigger arrangement fees, and demand at least a 25 per cent deposit. If you consider buy-to-let, you will also have to treat your second home as a small business; lenders will expect to see rental income that is 125 per cent more than the interest payments.
Another form of buy-to-let is the holiday let mortgage, which allows for longer own use, but still requires evidence that rents will cover the mortgage. "Holiday let mortgages are very limited as the rental income can go from feast in the summer to famine out of season," says Mr Hollingworth. "Leeds and Principality building societies are still offering them, but your options are narrowed and there are very few deals to chose from."
If you are not happy with the idea of your retreat becoming a burdensome business, you will need to consider remortgaging.
A remortgage is probably the cheapest of all the options, as you can use some of the equity in your current property to use as a deposit, or even buy outright elsewhere. But with the fluctuations in the market, don't expect to get the sort of loan to value you can achieve on standard mortgages.
"If you consider remortgaging, lenders will look to split the loan to value across both properties and are unlikely to offer more than 75 per cent of the combined value," says Ray Boulger, of mortgage brokers Charcol. "But you could also look at taking some of the equity to put down a bigger deposit on the second house with another mortgage to keep your interest rates down."
Mr Boulger also that warns that the options for a second mortgage are far more restricted now, than before the crunch.
"Most lenders now will only lend up to 75 per cent of the value of a second home, but the biggest blow to second home buyers is that most lenders have withdrawn their interest only products," he says. "These used to allow owners to keep their monthly payments down and they therefore would need less rental income to cover them."
If your dream home is overseas, financing becomes a little more complicated, if only because currency fluctuations are added to all the other variables. But, with the right advice mortgages are available.
Kevin Macadam, senior broker at overseasmortgagebroker.co.uk, which helps clients find a suitable lender in Europe and further afield, says: "The vast majority of overseas lenders are continuing to offer mortgages because they were not caught up in the sub-prime problems of the UK. There is no fast track, they insist on seeing all the paperwork – payslips, P60s and accounts – and the criteria is tight. But if you meet those then you will get a mortgage."
He adds European lenders usually insist that only one third of your income is swallowed by debt, including the new mortgage. So on a monthly income of £6,000 your debts must not account for more than £2,000.
"We advise our clients to look at all their options. For instance, if they have a £100,000 mortgage on a home worth £300,000, it would probably be worth them remortgaging in the UK to buy another for cash in, say, Bulgaria, rather than taking out a Bulgarian mortgage, as interest rates there are in excess of 13 per cent. But many Italian lenders can offer a fixed 2.7 per cent on the life of a mortgage, so a second mortgage would probably be cheaper than remortgaging."
Another option for those who would like a foreign bolthole is to consider buying into a leaseback deal on a tourist development, with a company such as Pierre et Vacances. The holiday firm has complexes across France, with properties for sale from a "cheap and cheerful" €100,000 (£88,000) up to €1m at the luxury end of the market.
"We attract the sort of client who wants a holiday home in France but doesn't want the hassle of managing it," says Nick Leach, the company's head of business development. "We offer a guaranteed index-linked rental income after all the management costs have been taken out."
He added that 90 per cent of P&V's owners go to French lenders, who are still offering 100 per cent mortgages, although with strict criteria. "People are understandable risk averse, preferring the guaranteed income of around 4 per cent of the value of the property," he says.
Whatever your second home aspirations, before you leap into buying bear in mind the warning of Mr Hollingworth: "It is important to do your research as many holiday homes, particularly those in developments, have restrictions as to who can sell on to, so that it remains a holiday let. This will limit any potential buyers when you wish to sell."
"Get your advice in early from brokers and solicitors, and do not be tempted to pay a deposit on a development before you have secured the mortgage. We have had clients who have come to us having paid £50,000 deposits based solely on the developer's legal and financial advice. But when they get home from their holiday they discover they can't get a mortgage. Always treat house buying abroad with exactly the same degree of caution as you would when at home."