Buying a Holiday Let? Why a Second Charge Could Help You Borrow More

Why a remortgage can fall short

When you remortgage to raise capital, your existing mortgage is repaid and replaced with one larger loan. The new lender assesses affordability on that entire amount, at its own stressed rates, even though part of it is simply replacing debt you already pay comfortably.

Where the money is going towards a holiday let, there is a further hurdle.

Many residential lenders will also factor the proposed holiday let mortgage payment into your affordability, alongside your new residential mortgage. Some lenders will not accept the purpose of the capital raise at all.

The result is that the maximum loan can fall well short of what you need, even with substantial equity in your home.

How second charge affordability differs

A second charge is a separate loan secured on your home, sitting behind your existing mortgage. Your current mortgage stays exactly as it is.

Because of this, second-charge lenders can take a different approach. Your existing mortgage is typically taken into account at its actual monthly payment rather than being re-stressed as new borrowing. Only the additional loan is stress-tested.

For homeowners on a low existing rate, that difference can unlock a higher level of borrowing.

When a second charge may be worth considering

• A remortgage cannot raise the full amount you need
• You are on a low fixed rate you would prefer to keep
• Leaving your current lender would trigger a significant early repayment charge
• You may want to repay the borrowing early, for example from a future property sale, and value a loan without early repayment charges
• You do not want to extend your mortgage term further into retirement

The trade-offs

A second charge is not the cheapest form of borrowing, and it is important to weigh the costs carefully.

• Rates are usually higher than mainstream residential mortgages
• Arrangement and broker fees can be higher, and are often added to the loan
• You will have two monthly payments to two lenders, and your combined commitment may be higher than with a remortgage
• Both loans are secured on your home

A real-world example

David (name changed) owned a home worth over £1 million, with a mortgage of around £257,000 on a 2.49% fixed rate. He wanted to raise £500,000 towards the purchase of a multi-unit holiday let.

Even after extending the term to 25 years, the best remortgage available fell around £48,500 short, required him to work until 73 and meant paying a £10,000 early repayment charge to leave his current lender. A second charge raised the full amount.

Figures are illustrative and based on the products available at the time of assessment.

The second charge cost more each month, but it was the only option that delivered the capital David needed. He kept his 2.49% rate, avoided the early repayment charge, and has the freedom to repay the new loan at any time without penalty.

How Drake handles second charges

At Drake Mortgages, we review your full position first, comparing a remortgage, further borrowing and a second charge side by side, so you can see what each route would genuinely achieve.

Where a second charge looks like the right fit, we introduce you, with your permission, to the specialist second-charge master broker we work closely with. They arrange these loans every day and have access to a wider panel of second-charge lenders than we do directly. We stay involved throughout, making sure the second charge fits alongside your holiday let mortgage and your wider plans.