How to buy a second home or property

About 10% of British people own a second home. Some are buy-to-let, others are second homes and holiday homes. Is buying a second home on your radar? People buy a second property for many different reasons, and like all such important, big-money transactions you need the facts at your fingertips before making a decision. Here’s some valuable guidance from experts in buying a second property.

Why Do You Want a Second Home?

It’s exciting. It’s inspiring. But it’s still an excellent idea to clarify exactly why you might want to buy a second home or property. It might be simply for leisure. You want a second home to retreat to, escaping the rat race for a more peaceful life during the holidays. Perhaps you want to fund your retirement. Maybe your children can’t afford a place of their own and you’re prepared to buy a home for them, sort out the mortgage yourself and charge them rent. You might work in a city but want to escape for weekends in the country. Some people buy a flat in the city to live in during the working week, to reduce their commute.

The covid-led trend for staycations means more people are investing in second homes in tourist areas. You might want to let a second home to create a new income stream, invest in property for the future or want to invest a large amount of money in a way that’s likely to deliver nice, big returns into the future. You may even fancy giving property development a try. The idea is you decide exactly why you want to buy a second home to do for you, then you can choose the perfect property accordingly.

What are the Costs of Buying a Second Property?

Obviously there are expenses involved in purchasing a second property. Your main home is called your primary residence or, as the tax man calls it, your principal private residence. Any extra property, including buying a second property to rent, is called your secondary residence. There’s always stamp duty land tax to consider, unless there happens to be a stamp duty holiday on the cards. Buying a secondary residence means you pay an extra 3% surcharge on top of the normal stamp duty rate and it applies even when the second property you buy is worth less than £125,000.

How about second property capital gains? You’ll need to think about capital gains tax. If you sell and the value of the place has gone up – as it invariably will – you’re taxed on the amount the value has grown. Your CGT allowance reduces the amount you pay but still, you’ll need to consult a financial adviser or accountant about how much you’ll be liable to pay. And don’t forget ongoing expenses like council tax, home insurance, and utility bills. Even when the place is left empty, there are still bills to pay.

What if you’ll be using the equity in your primary residence to pay for your second home? Or remortgaging your current home? You might want to take on a buy to let mortgage. They all come with a financial impact. And while it’s entirely possible to remortgage or release equity from your home to pay for a holiday home overseas, different countries come with different taxes and regulations, many of which will come with extra charges, especially now we’re no longer in the EU.

How to Buy a Second Property Using Equity

How to buy a second home using equity in an existing property? Equity release is a popular way to fund a second property purchase. The first question to ask is how much equity you have. It’s a relatively simple calculation involving subtracting your outstanding mortgage from the property’s estimated market value. Once you’ve pinned that down, you’ll know how much you can spend on a second property. Just remember that you can’t draw the full amount of equity out of the place unless you sell up.

If you’re an older or retired borrower, remember you might encounter limits around how much you can borrow. It usually depends on your age. Some lenders won’t lend to people aged over 70, but it tends to depend on your individual circumstances and ability to repay the loan. Look out for specialist mortgages designed with people like you in mind, or ask a good financial advisor.

Lenders consider various factors for buy-to-let mortgages. They’ll examine the local rental market and predicted rental income, assess your own financial health including your mortgage, and take any other regular financial commitments into account. Buying another place to live in along with your own home means you could try to get a second residential mortgage or even get a new mortgage to cover both properties. What you choose ultimately means pinning down the best rate, term and repayments for your situation.

Second Property Mortgage Options

There are several mortgage options available to people considering buying a second property. A second property mortgage could involve a mortgage for buy-to-let. The rates are usually higher than a residential mortgage, you’ll need a 25% minimum deposit, and they’re often interest-only.

If you’ll be living in your second property and take out a residential mortgage, then you’ll need to get your lender’s permission and maybe pay a fee. Bear in mind you might not get permission and could be subject to various terms and conditions.

If you’re having trouble selling your primary property you could convert your existing residential mortgage into a consumer buy-to-let mortgage, sometimes called ‘let to buy’. Like a buy-to-let mortgage it can come with a higher initial deposit and higher interest rates.

If it’s purely for investment, there are more options in addition to a buy-to-let mortgage. A bridging loan, simply a short-term loan, can make a property mortgageable while adding to its value, and you can always sell at a profit. They’re perfect for fast renovation projects. Then there’s a development loan, great for buying a second property, renovating it then selling for profit, ideal for big development projects and known for high interest rates.

You might need a mortgage to cover you and the person you’ll be sharing your holiday home with. You might want to buy with a business partner. A simple joint version of whichever mortgage you want will do the trick. Most lenders only offer joint mortgages to two people, some allow four.

What is Let-to-Buy?

Let-to-buy lending is a popular way to purchase second homes, and it’s very different from buy-to-let. Let-to-buy means renting your existing home to someone while you buy a new one to live in, and it means having two mortgages at the same time. Your existing mortgage converts to a buy-to-let mortgage, which means you can let your home, and you arrange an ordinary residential mortgage on the place you’re buying.

What is Buy-to-Let

Buy-to-let is one of the most popular ways to buy second properties for investment, and buy-to-let property investment can be very profitable. The question is, ‘how do I let my second home?’ Bear in mind you’ll have to pay tax. If your profits come in at £6,515 a year or more and it counts as running a business you’ll also have to pay Class 2 National Insurance. If you’re not running a business there’s no National Insurance. The first £1,000 of income from renting your second home out is tax-free, your ‘property allowance’. And you’ll need to report the income on your Self Assessment tax return if it mounts up to £2,500 – £9,999 after allowable expenses, or £10,000 or more before allowable expenses.

Stamp Duty on Second Homes

There are important stamp duty considerations for second homes. If you’re buying a second home you’ll have to pay an extra 3% Stamp Duty on top of the usual rate for each band and it applies to every property bought for £40,000 or more. How to avoid stamp duty on second homes? You can only avoid paying the tax if you’re buying a houseboat, caravan, or mobile home, are buying a second home worth less than £40,000, or when you’re buying a new main residence, as long as you intend to sell your current home.

Capital Gains and Council Tax on Second Homes

Capital gains tax on second homes means anyone selling a property where the tax is due will have to pay up within 30 days of your sale completion. Obviously this can mean cash flow problems, and failing to pay on time can lead to HMRC interest and penalties. As a basic rate taxpayer, you pay 18% on the profits you make selling a second property. As a higher or additional rate taxpayer, it’s 28%. The capital gains will be included when you figure out your tax, and could mean you end up in a higher tax band. On the up-side you have a personal annual Capital Gains Tax allowance, so can make some profits tax free. Couples jointly owning assets can combine their allowance, potentially avoiding the tax on a gain of £24,000.  

What about council tax on second homes? You might pay less Council Tax for a property you own or rent when it isn’t your main home. Councils can give furnished second homes or holiday homes a discount of as much as 50% but it’s entirely up to the council in question.

Second home buying wisdom

You understand the key considerations around purchasing second homes or property. You’re clear on the taxes you may have to pay, the mortgage options, and the costs. Now you can enjoy the buying process in the knowledge you won’t get any nasty surprises.