INVESTING IN A SECOND PROPERTY is on the increase.
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.
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.
The type of property, and how you are allowed to use it, will have an influence on the choice of lenders. Some properties cannot be lived in all year round and some can only be used for short term (holiday) lets. Our holiday let property guide explains this in more detail..
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 then you should apply for a second home mortgage. You’ll still have all the usual options, such as a fixed rate or tracker mortgage.
REMORTGAGE
Alternatively, if you own your main property, you could consider remortgaging to raise the funds rather than taking out a second mortgage, as long as you have built up sufficient equity.
Depending on how much is needed, you could capital raise to borrow the 25% deposit, or the whole amount.
Do you need a deposit to remortgage? – No, deposits are not needed. The lender will utilise the equity you have built up.
- About the Author
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Mark has worked in financial services since 1995, initially as a Financial Adviser and then a Compliance Officer.
He has been a Senior Holiday Let Mortgage specialist at Drake Mortgages since 2001. He is often quoted on lenders websites and can be found in the press, talking about holiday let and available finance.
