Finance: Coming back for seconds

The number of UK second homes is set to rise by a quarter in the next 10 years, says Stephen Pritchard

Buying a second home - on the coast, or perhaps in a peaceful rural backwater - is a common fantasy for anyone who wants to escape the discomforts of living and working in a city through the summer.

Even though prices in popular holiday areas have risen sharply over the last few years, owners who have built up equity in their main homes might well find that they can remortgage to raise at least a deposit for a second property. And lenders are increasingly willing to discuss loans for either holiday homes or weekend bolt-holes.

A study carried out last year by Direct Line, the insurers, suggests that the number of second homes in the UK will rise by 24 per cent in the next 10 years. By then, the second home market will be worth a staggering £53bn. And, despite the popularity of TV shows about buying abroad, Britons own twice as many second properties at home as they do overseas.

Demand for UK second homes is being driven by a number of factors. For some buyers it is purely a lifestyle choice. Rising house prices in urban areas mean that it might not be cost-effective to move to a larger house in the same area, so one option is to stay put, but to buy a second property in a cheaper area for weekend use. Some home owners may well buy a second property with retirement in mind, and start by living there at weekends, or during the summer.

But more flexible financing is probably the single, greatest factor in driving interest in second homes. Conventionally, most second home buyers have either used their savings to pay cash, or have remortgaged their main homes. But there are other options.

Most lenders will now accept applications from people who want a second home on their standard terms, according to Ray Boulger, senior technical manager at mortgage brokers John Charcol. Equally, lenders will be happy to allow home owners to remortgage their main home to raise the funds for a second property, especially if the buyer keeps the total loan to value below 75 per cent. "The most important requirement is to have enough income to support both mortgages," says Boulger. "The decision then is whether to raise all your money on the main residence, or to split it."

There are pros and cons to both approaches. Raising the total mortgage on one property will be cheaper in terms of fees, Boulger points out. But these savings can be wiped out if borrowing all the money on one property pushes the loan to value over 75 per cent, as this can trigger higher interest rates and high lending fees.

Splitting borrowing between both properties has other advantages. For home owners who buy a property mostly for their own use, perhaps as a holiday home, but expect to let it for part of the year, interest charges can be set against that income, giving lower tax bills.

Some lenders, but by no means all, will also take rental income into account when agreeing a second mortgage. Either way, a buyer who is hoping to use rental income to part-fund a second home will need to speak to their lender or a mortgage broker early on, because mortgage agreements often do not allow the property to be let.

And buy-to-let mortgages, which are designed for full-time lettings, often do not allow the property owner to stay there. Taking out a separate mortgage does also have one further advantage: it allows the buyer to make use of both repayment and interest-only mortgages. Whilst the majority of people buy their main home with a repayment mortgage, Boulger notes that an interest-only loan is a far more popular choice for a second home.

This is partially because paying interest-only keeps monthly payments low, but it is also because second home buyers are more comfortable about paying back the capital, perhaps from selling the second home or their main residence. "Buyers will not be looking to pay off both mortgages at the same time, so using an interest only loan is much more likely," says Boulger.