In 2018-2019 some 772,000 households reported that they also owned a second property, up from 572,000 in 2008-2009. There are many reasons to have a second home such as a holiday retreat, long term investments or even just a place to live in during the week when at work. Whatever the reason, there are things that need to be considered when looking at buying a second property and we will take a look at these considerations here.
Affordability
In some respects this is less to do with whether you can realistically afford the second property but whether you can prove it to a mortgage provider, if you need a mortgage. Typically, you would need a larger deposit, 25% normally being the least. You would also need to be able to show a stable and healthy income, especially if you already have a mortgage on your primary residence. If you are looking at the property in terms of renting it out as a long term let or a holiday let, you would not be able to apply for a standard mortgage and would need to apply for either a buy-to-let mortgage or a holiday-let mortgage. For both of these, you would need to be able to demonstrate what income you would be able to generate from the let and where any shortfall between that and the mortgage would come from, if there is a gap.
Given the larger deposit requirements, you will need to be able to show where that money is coming from, if you don’t have the savings, then you could consider re-mortgaging your main residence to free up any equity that you have. This will clearly increase your mortgage payments, so again, you would need to be able to prove that you can afford these increased payments.
Stamp Duty
In all regions of the UK, purchasing a second property, attracts a premium on stamp duty. In England and Scotland this is 3% on top of the standard rates and in Wales this is 4%, so there is no 0% band for the tax. This can add quite a large amount to the sum you have to pay the Government and you would need to factor this into the purchase costs.
Capital Gains Tax
Normally, when you sell your main residence, there is no capital gains tax (CGT). This is not the case for second homes. If your profit on the property is over £12,300 then you will need to pay CGT at either 18% or 28% depending on whether you are a lower or higher rate tax payer. Bear in mind that if the profit on the property takes a lower rate tax payer into the higher tax bracket then the calculation is a little different.
Council Tax
Council tax is still payable on second properties but there can be discounts if it is not your main home. This is entirely in the hands of the local council. If your property is empty for more than two years however, there is the possibility that it will attract a council tax premium.
Renting Properties
Some people buy a second home to rent it out to others either as a holiday let or a private rental and some people actually move into their second home and want to rent their first property. Each has its own considerations.
If you want to rent the property out you need to work out how to do that, what the rules and regulations are around these rental and what the costs are and what the tax implications are. If you want to rent out your primary property then you might well need to get permission from your mortgage company especially if you are on a standard mortgage. You might have to re-mortgage to a buy-to-let mortgage.
Buying a second property certainly has its merits but there are a lot of considerations and certainly some significant costs and complexities. Anyone considering a second property should make sure that they fully understand all the implications.
