Buying a Second Home - Everything You Need to Know

Many people fantasise about owning a second home, be it a cosy cottage in the country, a home away from home, or purely as an investment. If you are in the fortunate position to increase your property portfolio, there are not many disadvantages, and you hopefully already have experience in the property market from buying your first home. However, there are things to consider before you take the plunge. We will look at some of the considerations you need to keep in mind before undertaking another big investment.

Know Your Reasons

The amount of wealth held in second properties has increased by 50%, according to a study carried out by the Resolution Foundation, so more and more people are jumping at the opportunity to own more than one property.

That said, before you start house-hunting, you need to know exactly why you want a second home, and what you want to get out of it. The implications between owning a second home for your own personal use differs vastly from an investment property you plan to earn an income from.

Reasons for wanting a second home can include;

• A retreat from the hustle and bustle of the city, or alternatively, a place to stay in the city for work
• A holiday home at your favourite destination
• To apply your savings and invest it in a property that will increase in value
• To play the property market as a developer, and buy and resell homes
• To rent it out and earn rental income

How To Buy a Second Home

Getting finance for a second home differs slightly from buying your first property, and there will be tax implications. You need to know what you can afford, as it will be more costly – homeowner's insurance and property taxes will be higher on your second property.

If you need to apply for a mortgage, you will have to explain the purpose of the purchase. It is possible to get a mortgage for a second home while you are still paying off the first home, but your credit record needs to be squeaky clean, and you may be required to put down a larger deposit of approximately 15% to 25%. Your income must also match the extra expenditure. However, if you intend to rent out the extra property, the mortgage provider may consider this extra potential rental income.

Not everyone can buy a property with cash, nor do they have the funds lying around to cover the deposit. Another way to raise the deposit is to use the equity accumulated in the first home. Instead of taking out an extra mortgage, you can consider re-mortgaging your first home. To see if you can qualify for a re-mortgage, you need to deduct the remaining value of the mortgage from the current value of the home. Elderly borrowers can consider an RIO (retirement interest-only) mortgage to release some equity towards the deposit.

Holiday Homes

Having a place of your very own you can escape to is wonderful, and when you aren't visiting it, you can rent it out to tourists. What you intend to do with the holiday home will affect the mortgage application. If you have no inclination to rent out your home away from home, you can apply for a normal mortgage, and put down a higher deposit.

If you plan to rent out the property for parts of the year, however, you will have to apply for a special holiday-let mortgage, which will require a larger deposit at 25%. Lenders will decide in your favour if the rental income is equivalent to 125% -145% of the interest due on the mortgage. Lenders will be reluctant to grant a mortgage for holiday parks due to the restrictions placed on these parks.

Holiday-let mortgages do have one perk in the way it is taxed. If the property is available to rent for a minimum of 210 days per year, it is considered a business, so you can deduct all your expenses from the rental income, including the interest you pay on the mortgage.

A word of caution to homeowners who later decide to rent out the holiday home – you need to apply for "consent to let" from the lender, either at a fee or a higher interest rate. If you fail to get permission and rent it out anyway, you may be forced to re-mortgage, at an additional fee, of course.

Rental Properties

Similar to holiday homes, if you are planning on renting out the second property on a long-term basis, you need to apply for a buy-to-let mortgage instead. The required deposit will also be higher at a minimum of 25%, and the interest rate will be higher than a standard mortgage.

Costs of Buying a Second Home

Aside from the usual costs in conveyancing fees and insurance, you will also need to consider;

• Stamp duty – Stamp duty on a second property is more expensive than on your primary residence. For a second property, you will pay 3% tax on the first £500,00, and an additional 8-15% on purchase prices above this amount.
• Council Tax – There is some good news. You may be eligible to pay less council tax on the second home, as some local authorities offer a discount. Holiday homes also get a 10% reduction in council tax.
• Capital Gains Tax – You will have to pay capital gains on your second home if you decide to sell it. The primary residence is exempt from these taxes, so it is important that you know which of the properties is classified as your primary residence. Capital gains are currently taxed at 18% for a basic taxpayer, and 28% for a high rate taxpayer.