Investing in a second property is on the increase. The number of people in the UK who own more than one property has increased by more than 50% over the last 20 years.
If you’re thinking about buying a second property, here are some of the financial implications you need to consider.
Make sure you factor in additional expenses such as Stamp Duty and potential Capital Gains Tax on your second property in the future. When doing your calculations these can add significantly to the overall cost. There will also be ongoing expenses to consider such as council tax, insurance and utilities.
REASONS TO BUY A SECOND PROPERTY
- You can rent it out as an investment
- You can use it as a holiday home
- It can be a place to live in the future
- You can sell it at a profit in the future
- It can provide income in retirement
- It can be passed on to your children or grandchildren.
CONSIDER YOUR GOALS AND MOTIVES
Before you buy a second property, make sure you have a clear idea of your goals and motives. Buying a property for the sole purpose of making money may not be the best idea if you’re not comfortable with the risks involved.
Think about whether you want to use the property as an investment or for personal use. If you’re thinking about renting it out, research the potential rental yields in your area. You also need to factor in how much time you will spend managing the property and any associated costs.
If you’re buying a property for personal use, make sure you can afford to pay for both properties outright. It may be more financially viable to buy a smaller property rather than stretching yourself too thin.
The motive for buying a second property may not only be financial. Maybe you want a holiday home to visit on weekends, holidays or in the summer. Or you’d like to live in the home when you retire or pass it on to your children.
Whatever your reasons for buying a second property, make sure you do your homework and consult with an expert if needed.
But, even if you’re buying for these reasons, you’re likely hoping that you’ll make some money from the property over the long term. Property is generally considered a relatively low risk long-term investment, but you do need to be aware of the costs that are involved.
STAMP DUTY FOR SECOND HOMES
As a homeowner, you’re probably familiar with Stamp Duty, the tax you pay to the government when you buy a property.
If you’re buying a second residence in England or Northern Ireland you’ll currently pay a Stamp Duty surcharge on top of the standard Stamp Duty rate.
CAPITAL GAINS TAX FOR SECOND HOMES
Another tax that applies is Capital Gains Tax. This is a tax charged on profits you make from selling valuable possessions and investments, this includes second homes. If you’re thinking of selling your second property in the future, you need to factor in Capital Gains Tax.
You may be able to avoid paying this tax if you live in the property for a certain period of time or if it’s your main residence when you sell. It’s always best to seek professional advice to understand your tax liability before you sell.
MORTGAGES FOR SECOND PROPERTIES
Before you commit to purchasing a second home you will need to decide how to finance it. There are a number of mortgage options available depending on your financial situation.
In another article we answer the question Can you remortgage to buy another property?
The type of mortgage you’ll need depends on how you’ll use your second home. For example, you might be looking for a buy-to-let mortgage, holiday-let mortgage or a second home mortgage.
BUY-TO-LET MORTGAGE
Most conventional mortgages won’t allow you to rent out your property to long-term tenants, so you’ll need a mortgage specifically designed for buy-to-let investors.
Buy-to-let mortgages work in a similar way to regular residential mortgages, but there are some key differences. Typically, you’ll need a larger deposit (usually 25% or more) and the interest rates are usually a bit higher.
The mortgage lender will also assess whether the rental income from the property will be high enough to cover the mortgage payments. They’ll usually want to see that the rental income is at least 125% of the monthly mortgage payments.
Often, buy-to-let mortgages are interest only, meaning you won’t need to make capital repayments until either the end of the mortgage term or when you sell the property.
If you’re looking to buy a property specifically to rent it out long term, then a buy-to-let mortgage is probably the best option for you.
HOLIDAY LET MORTGAGE
If you’re planning to buy a second property that will be fully furnished and primarily rented out, then you will need a specialist holiday let mortgage.
Holiday rental mortgages work in a similar way to buy-to-let mortgages, but there are a few key differences. Typically, you’ll need a large deposit (usually 25% or more) and the interest rates are usually higher. There are fewer lenders operating in the holiday let sector.
The mortgage lender will also assess whether the rental income from the property will be high enough to cover the mortgage payments. They’ll usually want to see that the rental income is at least 125% of the monthly mortgage payments.
Personal use is usually allowed for up to 60-90 days per year and the mortgages can be on an interest-only or repayment basis available on holiday cottages across mainland UK. The maximum loan to value is typically 75%.
What deposit do you need for a holiday let?
What is a serviced accommodation mortgage?
How does a holiday cottage mortgage work?
What does fully furnished mean?
SECOND HOME MORTGAGE
If you’re looking to buy a property that will be your second home or holiday home (rather than an investment property) then you might be able to get a second home mortgage.
The criteria for getting a mortgage on a second home are similar to the criteria for getting a mortgage on your first home. The mortgage lender will assess your income and outgoings to make sure you can afford the mortgage payments. They’ll also look at your credit profile to see if you’ve been managing your finances well in the past.
The deposit you’ll need to put down is usually at least 25% of the property value, but this can vary depending on the mortgage lender. Lenders will be happy with most types of houses, but be wary of those that have Section 106 occupancy restrictions.
You’ll still have all the usual options, such as a fixed-rate or tracker mortgage. Alternatively, if you own your property outright, you could consider remortgaging rather than taking out a second mortgage, as long as you have built up sufficient equity.
Our Guide to remortgaging explains how this would work.
If you already have a mortgage on your first home, the mortgage lender will also take this into account when assessing your application for a second home mortgage. They’ll want to make sure you can afford the payments on both mortgages.
Second home mortgages are available on properties across mainland UK. The maximum loan to value is typically 75% or less.
SPECIALIST PROPERTY MORTGAGES
The vast majority of properties, and their mortgages, are for buildings constructed with brick or block walls and a tiled or slate roof.
But then there are the other ‘non-standard construction’ homes. These are made with different materials, or perhaps have been converted from an agricultural or commercial building.
Specialist Property Mortgages are needed for these properties, and the best person to help you will be an independent mortgage broker.
Here are just a few of these ‘special property types’:
- Barn conversion
- Castle
- Church conversion
- Thatched cottage
- Old School House
- Post Office
- Steel framed houses
