If you’re looking for a second home to rent, lend to your kids, or just enjoy for yourself, there’s plenty to consider. We’ve rounded up nine key points you need to know before taking the plunge.
1. A second home may require a different type of mortgage
If you need a mortgage to fund your second home, it can be one of three different types. And the type you need will depend on what you plan to use the property for.
If you just want to buy another property for yourself and your family and friends, you will need a second residential mortgage. It’s like a regular mortgage, but applied to a second home. However, it is not designed for a house that is rented out to strangers. Some lenders don’t allow it in their mortgage terms at all, while others may let you let it out for a few weeks out of the year.
If you are buying a property in a tourist hotspot and want to rent it out frequently, especially during peak holiday periods, you will need a vacation rental mortgage, while if your intention is to continually rent the property to tenants over a long period. Eventually, you will need a rental mortgage.
Either way, it’s a good idea to hire an independent mortgage broker free of charge. They will be able to discuss your needs, tie in with your finances and find the best mortgage for you.
Free mortgage advice
Trussle is a Trustpilot 5-star rated online mortgage advisor who can help you find the right mortgage – and do all the hard work with the lender to secure it. *Your home can be repossessed if you don’t continue to pay your mortgage.
2. You will need a big deposit…
You must pay money for a deposit on a second home that totals at least 15% of the property’s value – or 25% if it’s a buy-to-let.
If you have sufficient equity in your primary residence, it may be possible to remortgage and increase your home loan. This frees up money for a deposit on your next property.
You will also need to show income at a level that shows you can afford a second home.
All mortgage applications will be subject to a credit check. So make sure your credit report is in good shape. Use a credit reference like Experian, Equifax or TransUnion to verify your report. It will show your borrowing and repayment history. You will also receive a score, which indicates whether or not you are a good bet to take credit.
3. …and affordability is key
However, a high income and a large deposit does not automatically mean that you can afford a second home. Lenders will review your existing mortgage payments, equity in your primary residence, and any other debts or expenses. A careful examination of your finances determines whether or not you can afford the financial burden of a second mortgage.
When reviewing your budget, consider what is reasonable rather than just what is possible. You can use an online second home mortgage calculator to get an idea of how much you can borrow. These can be found on many bank and building society websites.
4. Mortgage rates for second homes can be higher
Mortgage rates, as well as fees, may be higher for second homes compared to financing your primary residence. This is particularly the case with rental mortgages, although these also tend to be paid off on an interest-only basis.
The capital (the purchase price you accept for the property) is paid at the end. Paying interest only up front means lower monthly payments. However, it is possible to get buy-to-let repayment mortgages, where you pay interest and principal together upfront.
Either way, your broker will factor higher mortgage rates into your affordability calculations. To get started, you can check what today’s mortgage rates are with our Mortgage Charts (below) from Mortgage Broker Trussle. If this is a rental mortgage you require, check the box.
5. The lender may ask for proof
A lender might want proof that one of your properties is your primary residence.
He might also want to know Why you buy a secondary residence.
If this is a buy-to-let, be prepared to demonstrate how rental income will exceed mortgage payments, usually this should be at least 25%. And if it’s a vacation rental, your mortgage provider will base their loan on the expected rental income.
6. Stamp duty is higher on second homes
You will usually pay an additional 3% for Stamp Duty Property Tax on top of the standard rates when buying a second home, if it is worth over £40,000.
Standard rates are tiered based on the value of a property. For example, people buying their main residence pay nothing on the first £125,000, but second home buyers pay 3% on that same level. And the additional 3% will be charged on subsequent stamp duty levels thereafter.
Stamp duty applies to homes in England and Northern Ireland, but does not apply to barges or caravans.
In Scotland or Wales, the surcharge is an additional 4% on second homes. In these countries, the charge is known as land and property transaction tax and land transaction tax, respectively.
7. You can ‘rent to buy’ as well as ‘buy to rent’
A mortgage with option to buy is for people who want to rent out their primary residence so they can buy another place to live. This could suit owners who are struggling to sell or want the option of returning to their original home in the future.
Although buying additional property incurs additional stamp duty, you can claim a refund on the additional amount if you sell your old home within three years, as it was your primary residence.
The market for mortgages with an option to buy is more limited and it is wise to seek advice from a broker.
8. It’s not just stamp duty…
After the stamp duty, other taxes follow. For example, if you rent out your second home, you pay income tax on any profit. Fortunately, you can deduct expenses first, such as rental agent fees and building insurance. And you get the base rate of mortgage interest tax relief.
And, unless your secondary residence is a vacation rental, the residence tax is also due. If the property is often left empty, contact the relevant council to ask if they apply discounts.
But if it sits empty for too long – two years or more – you could be charged more.
Owners of vacation rentals do not have to pay council tax.
When you sell a second home, capital gains tax may apply. This is a profit tax when you sell a property that has increased in value.
Your tax-free allowance is £12,300. This can be deducted from profit, along with selling costs, such as legal fees and estate agents’ fees. Add the rest to your annual income.
Anything within the base rate threshold incurs the 18% tax. Any amount in the upper bracket is payable at 28%.
9. …and you’ll need to factor in other costs
You will need to factor in mortgage arrangement fees, legal and survey fees when buying a second home, as well as home insurance.
Once you’re up and running, you’ll also need to factor in the ongoing costs of your second home. This can include anything from fixing broken appliances, to working with a property management company, to covering for downtime. The latter is a period when the property is empty, with no tenants to cover mortgage repayments.
While the costs and hurdles associated with buying a second home can seem exorbitant, if you’re lucky enough to be able to do so, few people regret investing in real estate. As well as being something you can personally enjoy and benefit from, UK property prices have continued to rise every year – and bricks and mortar present a tangible and useful asset to pass on to the next generation.