Owning a second home is an aspiration for many homeowners, after all, who could resist having your very own home by the seaside, or a hidden cottage deep in the rural countryside?
Whether you’re interested in owning a holiday home, looking to earn a little bit of extra cash from renting or considering entering the potentially lucrative world of house’ flipping, our in-depth guide will detail all you need to know to get your property hunt underway.
Types of Secondary Homes
While owning a second home can have its perks, you should first understand why you want another property, and secondly, what you intend to do with the property, before rushing into any purchasing decision.
There are two types of secondary homes – a holiday home and an investment property. Both types of second homes have nuances and subtle differences in their average mortgage and deposit rates, so it’s essential to know what you’re looking for from a second home.
Buying a Holiday Home
If you have a place in the UK that you love to visit frequently, then buying a second home in the area can help to make your favourite place feel like home. Not only will you have a base there, but you can even rent it out to other tourists when you’re not there.
As the owner of a holiday home, how often or how infrequent you choose to let your property is entirely up to you.
Should you wish to take a more hands-off approach, then you can go with a holiday home management firm who will manage the property on your behalf while taking a percentage of your profits.
Alternatively, if you wish to generate the maximum amount of revenue from your holiday home, you can manage and list it yourself, or of course, use it for short term lets on websites such as Airbnb.
Buying an Investment Property to Rent
The other type of second home are investment properties. Falling under the ‘buy to let’ umbrella, these homes are usually purchased with the sole purpose of generating maximum rental income over a sustained period.
Investment properties are often seen as a great way to generate additional income, but please do keep in mind that the associated taxes and additional costs (such as increased stamp duty) have made the buy to let market significantly less appealing than it has been in previous years.
However, should you find an affordable property in a highly sought-after (or upcoming) area, you could stand to earn a significant amount of extra cash per month from renting the property out.
Reasons to Buy a Second Home
As briefly mentioned above, there are several reasons why you may consider buying a second property, beyond purely as a holiday home.
To help you learn more, please see below for some of reasons for buying a second home:
One of the most popular reasons for buying a secondary home is to sell it for a profit at a later stage. This process is often revered as ‘flipping’.
In order for house flipping to be successful, there needs to be a robust and strong housing market, with considerable demand for properties amongst prospective homebuyers.
Commonly, people who wish to flip their homes buy a relatively cheap property (often via auctions) that needs some renovation work. Once the buyer has carried out the renovations, the buyer will then sell the property on as a finished, and ready to live-in home.
During a property boom, house flipping can be a very lucrative practice. However, as the property market can be volatile, any downturns or market crashes, could result in your home losing value and potentially being worth less than what you initially bought the property for.
Should you be interested in becoming an independent property developer or house flipper, it’s important to have a safety net to cushion the financial impact in the event of an economic downturn.
Additionally, you need to also factor in the renovation costs to make sure that the property will still be able to turn a profit, even after the renovation work has been completed.
For Business Purposes
As long as the property is not used solely for business purposes, it will be classed as a mixed-use property.
Mixed-use properties have lower stamp duty than full residential premises, but the classification will leave you open to higher business rates and a variety of other business-level taxes.
Buying for Others
If you’re already a homeowner and you are buying a second home with a relative, your new home will still be counted as a secondary residence, and you’ll have to pay a stamp duty surcharge.
Despite your best intentions, buying a second home to help a family member get on the property ladder might not be the best way to help, as along with the stamp duty, you’ll also be subject to additional tax which could result in the property costing more than it would have been for the first time buyer themselves.
Buying with Equity
One of the other ways you can buy a second home is through the release of the equity you have built up in your existing home.
Equity refers to the value of your home minus the mortgage owed. As a homeowner, to find out how much equity your home has, all you need to do is deduct the remaining amount left on your mortgage from the current value of the property.
Using equity to raise a deposit is often done by older homeowners who have paid off a significant portion of their mortgage already, and only have a few years left to clear on their current deal. However, regardless of your age, using the equity in your home will allow you to remortgage your current home to cover the deposit of your second property.
Once you’ve decided what type of second home you’re looking to buy, and the reasons for your purchase, it’s now time to consider the financial aspects
Mortgage for a second home
Unless you decide to buy a house using equity released from your current property (or have substantial cash savings), you’re likely to require an additional mortgage for your second home.
Mortgages for second homes tend to differ from a mortgage you would typically get with a first home. As a lender, your mortgage provider will often require more financial information from you before your mortgage can be approved, these include:
- Substantial Deposit – Second homes will often require a higher deposit compared to regular purchases or first-time buyers – Typically, you’ll be expected to pay at least 25% of the property’s value.
- High Income – Naturally, as you’ll be taking on two mortgages at once, you need to prove to the lender that you can afford the repayments of both your existing mortgage and the one for your second home.
- Good Credit Score – Lenders need to see that you’re a reliable and trustworthy borrower before they consider you for a second mortgage
- Rental income (optional) – If you’re planning to let out the second home, you’ll need to provide mortgage lenders with the details of the expected rental income.
In addition to the above information, lenders will tend to have specific requirements depending on the purpose of your second home.
Mortgage for Holiday Homes
Mortgages for a holiday home that you DON’T intend to rent out are not too dissimilar to that of a normal mortgage you would come across when buying a standard property.
The one main difference of a second home mortgage, however, is that fact that you will nearly always be asked for a larger deposit (around 15%) than you previously would have had on your current home.
Mortgage lenders will often ask for a considerably larger deposit for a second home as this will signify your financial capability and offer some reassurance to the lender. The increased deposit is intended to highlight that not only can you realistically afford the property but that you’re also able to keep up with the higher interest rates and fees that you’ll incur as part of your new mortgage.
Mortgage for Long-Term Rentals
If you intend to rent out your second home, you will need to apply for a either a buy to let mortgage or a special type of mortgage, known as a ‘holiday-let’ mortgage.
Typically, holiday-let mortgages require an even larger deposit than a standard holiday home would, with the bar being set around a deposit of 25%. Before agreeing to the mortgage, lenders will assess whether the property will be able to provide a rental income that greatly exceeds the interest payable on the mortgage.
The most significant advantage of a holiday-let mortgage is the way it is taxed. Furnished holiday lets that are available to holidaymakers for a minimum of 210 days per year are classed as a business; this allows you to deduct all your expenses from your rental income before you are assessed for tax… including the interest you pay on your mortgage!
Mortgage for Short-Term Rentals
While the idea of sharing your holiday home with a myriad of tourists can be appealing, renting your holiday home on a short-term basis is, unfortunately, a lot more problematic than long-term rentals.
Due to the high guest turnover, lack of a guaranteed tenant and the risk of damage, many mortgage lenders are reluctant to grant mortgages for short-let holiday homes. Additionally, most lenders will not offer mortgages for mobile homes either as they tend to have restrictions on use that could limit their available market should the lender be forced to repossess and sell.
However, if you’re set on becoming an Airbnb or HomeAway host, then all hope is not lost. While it may be harder to find suitable lenders, there are a raft of challenger banks and building societies that cater to short term lets, so be sure to shop around.
Beyond the upfront costs of a deposit and solicitors fees, there are also a number of other costs you need to consider when purchasing a second home.
Second Home Insurance
As with regular house purchases, buying a second home also comes with a variety of additional insurance measures to take into consideration.
What differentiates a second home’s insurance policy from the first is the cost, quite often second home insurance policies will be far higher than that of a first (or replacement) home, especially in regards to contents insurance.
As with a first home, second home contents insurance is not a legal requirement. However, to go without insurance for your second home is even more of a gamble as you will naturally spend more time away from the property than you would do with your main residence. As such, content insurance on your second home is virtually a necessity.
The majority of policies will cover your contents in the event of fire, storm, flood, and theft.
To calculate the amount of contents insurance you would need, you should work out how much it would cost to replace your items by doing an inventory check on a room by room basis.
When doing an inventory check, it’s important not to undervalue your items, as in the event of an insurance claim you may not be able to claim the full value required to replace the items.
Usually, second home insurance policies do not cover personal valuables, nor do they cover the possessions of any guests who may be staying in your property. As such, if you or anyone else is present in your home, or if you take valuable items to your second home, you are doing so at your own risk.
Second-home Stamp Duty
Unlike first time buyers or home seekers who are looking to replace their main residence, buying a second home will incur stamp duty land tax, regardless of the value.
When you buy a secondary property, you’ll have to pay an additional 3% on top of the regular stamp duty band you would normally come under.
Capital Gains Tax
If you’re interested in buying a second home, it’s important to consider that you will also be liable for capital gains tax if you were to sell the property.
In the event that the value of the property increases your personal tax-free allowance (currently £12,570 as of April 2021), you will have to pay up additional tax. Should you be on a higher (additional rate) taxpayer, your capital gains tax percentage could be as high as 28%.
(Council Tax, Income Tax, Bills & Maintenance)
While it’s easy to focus on the main costs such as the deposit and the various major taxes, it’s important to also consider that by owning a second home you will have to pay more bills than you would do if you were to own just one residence.
Of course, should you decide to rent out your second home you can offset the cost of these bills to your tenants. However, do keep in mind that by renting out your home, you may become liable to pay income tax for any profit generated from the rent.
In addition to income tax and general bill & maintenance fees, you’ll also be subject to council tax too, which is payable on any second home that is furnished, even if no one lives in the property.