Second Home Loans: Know EverythingOn November 18, 2019 by admin
Did you know that when applying for a second home loan you will be subject to different financing conditions? As a rule, financial institutions have higher spreads and shorter maturities relative to permanent housing solutions. Find out why.
Buying a second home for rent can be a great solution to getting some extra income. You can choose to invest in tourism and buy a house to rent for short periods of time or choose university areas where student apartment rentals are quite common for a longer period of time.
Why are the conditions for a second home loan different?
Firstly, there is a greater likelihood of default on a second home loan if the homeowner has financial difficulties, a tenant is missing, or other complications. Banks’ precautionary approach to this risk ultimately results in the spread widening.
Another risk factor may be the devaluation of the property, which may interfere with the ability to repay the loan in case of sale of housing by the investor.
Yet another aspect that impacts the conditions of a second home loan is the LTV (Loan-to-Value). This factor defines the amount of financing granted to the investor based on the appraisal value of the property, which is generally lower for a second home than for a permanent home.
The table below provides examples of the conditions of some banks – in terms of financing amount and repayment term – that provide specific second home loan solutions to broadly illustrate market supply.
As a rule, a second home loan has a lower maximum loan amount than a first home loan.
For example, General Deposit Box defines that the maximum amount of financing for permanent housing is the lowest between 80% and 85% of the appraisal value, always dependent on the analysis of the proposal. In the case of second home loans, this bank only grants the lowest value between 75% of the appraisal value and 80% of the investment value.
In Santulan there is a slight decrease, with the amount of first home financing being the lowest between 85% of the appraisal value and 90% of the acquisition value while the second home credit is only financed at the lowest value between 70% of the appraised value and 80% of the acquisition value.
EuroLife establishes second home financing at up to 80% of the minimum value between the appraisal value and the purchase price, while for home ownership the financing is up to 90%.
In turn, Daisy Bank has two credit solutions for second home: credit for leasing and credit for 2nd home, and for both modes LTV is 80% based on lowest transaction value (defined by value) versus appraisal value (defined by the appraisal report) .
It can be concluded that the percentage of the maximum amount funded varies from institution to institution, so it is important that you compare all offers on the market to find the one that is most beneficial to you.
Since the spread is usually higher for second home loans, the APR will also tend to increase. This measure is a way for the bank to guard against potential defaults on credit repayments.
Shorter payment term
Some institutions restricting the loan repayment period when it comes to financing the purchase of a second home, such as General Deposit Box, where permanent housing offers repayment terms of 40 years and second home only. at 30.
In the case of EuroLife and Santulan, the repayment term is up to 40 years, remaining the same as the condition presented in the first home loan.
Daisy Bank offers different payment terms for both modalities presented in the table above. If the purpose of the second home loan is to lease, the maximum term is 30 years, while the second home loan is already extended to 40 years (becoming equal to the conditions for the first home purchase).
If you are considering buying a second home, it is important that you consider these aspects before making a decision. You should look especially at your effort rate, especially if you already have a first home mortgage loan.