Already own a property, and thinking about buying another?

INVESTING IN A SECOND PROPERTY is on the increase.

In fact, the number of people in the UK who own more than one property has risen 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

There are several ways that you can make a profit from buying a second property:

  • By renovating the home and reselling it, hopefully for more than you paid
  • By owning it for several years or more, since property prices tend to increase over long periods
  • By renting it out as a buy to let to long-term tenants
  • By renting it out as a holiday let for short periods

CONSIDER YOUR GOALS AND MOTIVES

The motive for buying a second property may not only be financial. Maybe you want a holiday cottage 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.

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 pay a 3% Stamp Duty surcharge in addition to 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, including second homes.

For each tax year, every individual has a capital gains allowance, which is currently £12,300. The Chancellor announced in Budget 2021 that the annual exemption will remain at this amount for the tax years 2021/22 to 2025/26.

Any profits you make from selling assets, including a second home, up to this amount are tax-free. If you gain more than that from selling the property, you’ll be liable to pay Capital Gains Tax at a rate of 18% (if you’re a basic rate taxpayer) or 28% (if you’re a higher or additional rate taxpayer).

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.

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 conventional mortgage.

BUY TO LET MORTGAGE

Most conventional residential 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. These tend to require a higher deposit (usually 25% or more of the total property value, compared to 5% or more for conventional mortgages).

Often, buy to let (BTL) 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.

HOLIDAY LET MORTGAGE

Short term holiday lets are considered riskier than long term BTL lettings since the income they generate is less predictable (buy generally higher) and relies on your property receiving bookings across high and low seasons. So, you’ll need a specific mortgage for holiday lets.

Personal use is usually allowed for up to 90 days per year and holiday let mortgages can be on an interest-only or repayment basis available on UK freehold and leasehold properties. The maximum loan is typically 75%.

SECOND HOME MORTGAGE

If you’re buying to use the property yourself as a holiday home the you should apply for a second home mortgage. 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 to raise the funds rather than taking out a second mortgage, as long as you have built up sufficient equity.

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