Buy-to-Let Second Charge Mortgages

What is a second charge buy-to-let mortgage?

A second charge mortgage is a loan taken out with a different lender than that which provides your 1^st charge mortgage. You will need to secure this loan against the property you are mortgaging, so your first charge mortgage lender needs to approve your application.

Second charge mortgages can be taken out on buy-to-let properties as well as residential properties.

When should I use a second charge buy-to-let mortgage?

You should consider applying for a second charge buy-to-let mortgage in the following circumstances:

• You need to raise funds quickly against the equity in your btl property.
• You are considering remortgaging the property but have been quoted an unfavourable interest rate.
• You are interested in another property and need a lump sum for a deposit or to buy outright.
• Your rental property needs refurbishment and you don’t have the funds available.
• You wish to extend or expand the property.
• You’re looking to release the funds that you invested when purchasing the property.

What are the key considerations before taking out a second charge on a buy-to-let property?

The key considerations before taking out a second charge buy to let mortgage are:

• Is there any reason your prime mortgage lender will block your application for a second charge buy-to-let mortgage? As this loan is secured against the mortgage lender’s security, they have the right to refuse permission
• Do you have a stable, reliable tenancy agreement for the property that ensures you can make your repayments – and still turn enough profit to make the mortgage application worthwhile?
• How will you make repayments on the mortgage loan if your tenants move out or refuse to pay their rent?
• Do you have plans to change the make-up of the buy-to-let agreement, such as turning it into an HMO? If so, you’ll need to check if your chosen lender will allow this.
• When interest payments are factored into the agreement, will your rental yield provide sufficient income to justify the loan?
• Would you receive a better deal if you pursued a different line of funding, such as an unsecured loan for a smaller sum or remortgaging with your first charge mortgage lender?

This all depends on your personal circumstances. A second charge buy-to-let mortgage is a good idea under the following circumstances:

• You are confident you can use the funds profitably, therefore benefitting from the loan.
• You’re looking to raise funds against your property and have a very low interest rate or early repayment charges on your current buy to let mortgage.
• You are looking for a sum that offers a high loan-to-value ratio on your equity. Most lenders will cap borrowing at 75% of your property value.

How can I calculate whether I can afford a second charge loan?

You can calculate whether you can afford a second charge loan by using a second charge mortgage calculator.

How much you’ll need to repay depends on several factors, which we will elaborate upon in a moment. Once you have an offer in place, including an interest rate, you can use the ABC Finance second charge mortgage calculator to determine how much you can expect to pay each month.

To give you an idea of the sums you’ll be looking at, let’s review how much you would need to repay on a second charge buy to let a mortgage loan of £40,000 at an interest rate of 7%.

	Capital Repayment Loan	Interest Only Loan
5-year repayment term	£792.05	£233.33
10-year repayment term	£464.43	£233.33
15-year repayment term	£359.53	£233.33
20-year repayment term	£310.12	£233.33
25-year repayment term	£282.71	£233.33

Consider your income and rental yield, and assess whether these repayment figures are realistic.

What interest rates will I pay?

Interest rates on a mortgage are determined according to risk. The interest rate you are offered on a second charge buy-to-let mortgage will depend on various factors. These include:

• The amount you are looking to borrow compared to your equity. The lower the loan-to-value on your request, the lower the interest rate will likely be
• Your personal credit history. Bad credit will not necessarily stop you from qualifying for a second charge buy-to-let mortgage, but you will be considered a higher risk borrower – this will be reflected in your interest rate
• How much experience you have as a landlord. Lenders feel more comfortable with buy-to-let mortgage applications from people that can demonstrate successful rental arrangements in the past
• Your ability to meet lenders affordability assessment. The stronger the affordability, the lower your interest rate is likely to be.

 Buy-to-let mortgage interest rates are often around 1% higher than traditional residential mortgage agreements.

 Second charge mortgages are also more expensive than first charge mortgages, as your second charge lender has less security than a 1^st charge lender.

Yes, you can get a fixed rate second charge mortgage on an investment property.

If you have a fixed rate mortgage, you will also know how much you need to repay. Such consistency will help you keep on top of your finances. A tracker mortgage means that your monthly payments could rise or fall each month, depending on the Bank of England Base Rate.

Yes, you can get an interest only second charge loan on an investment property. Most lenders will also consider offering interest-only second charge buy-to-let mortgages. This means that you will only need to pay the interest on your loan every month. The full sum that you borrowed will then be repaid at the end of the end of the mortgage term as a lump sum.

This approach will not work for everybody – you will be entering a legally binding agreement to pay off your loan in total. If you cannot fulfil this obligation, you will be expected to sell the property or face repossession.

That said, monthly interest-only repayments will be much lower than any agreement that includes capital – especially over a shorter loan term.

Interest only loans are usually best if you plan to sell your buy-to-let property in the future. This is often used by landlords who want to benefit from high rental income while keeping their outgoings low.

Alternatively, you can take advantage of the smaller monthly repayments to save up enough money over five years to settle your balance.

Who can get a buy-to-let second charge mortgage?

The criteria to qualify for a second charge buy-to-let mortgage is typically as follows.

• You own a property that is not used as your primary residence
• You have a mortgage on this property with an outstanding balance
• You have equity in this property
• You can prove that you will be able to keep up with repayments through income and your rental yield
• You have permission from your first charge mortgage lender to take out a second charge mortgage

Beyond these basic requirements, your unique finances will be considered when deciding whether to approve a second charge buy-to-let mortgage.

Yes, you can get a second charge buy to let loan with bad credit. For borrowers with poor credit, specialist lenders are usually required.

Owners of other buy-to-let properties are especially likely to be forgiven for late repayments, for example, if they can prove that these were caused by tenants failing to pay bills on time.

However, this does not mean that bad credit will not influence your application for a second charge buy-to-let mortgage. As discussed, a substandard credit score may lead to a higher interest rate being applied to your application.

To improve your chances of approval, you should ensure that you prepare the required documents upfront. This will make it easier for the lender to approve you by answering any concerns they may have.

In addition, ensure you respond to any requests for further information quickly and to a high standard. A lack of clarity will inevitably make the chances of your application being improved increase.

How can I find the best second charge mortgage lenders?

While you are welcome to seek out second charge mortgage lenders online for yourself, it’s highly advisable to seek the services of a professional.

Many lenders are reluctant to offer buy-to-let second charge mortgages directly to the general public.

Using a second charge mortgage broker to find the best deal can allow you to quickly compare products from across the market quickly. While many brokers charge high fees of up to 12.5% of the loan amount, we chare a flat, £1,495 fee when the loan completes.