Buying a second property

If you’re fortunate enough to be able to afford a second home, you’ll find the experience a little different from buying your first. On the plus side, the process may be simpler and less stressful, as you won’t be simultaneously selling your current home and moving out.  On the downside, there are higher costs involved, both in the short and long term.

Even though you may be an experienced buyer by this time, it can still help to consult a mortgage adviser on a second home purchase. Here are the questions to address together.

Why do you want a second home?

There are many reasons why people buy more than one home. Maybe you work in a city but prefer the country life, and want space and fresh air at the weekends but a local place to stay midweek. Equally, your job may take you to different parts of the country. A second home may also serve as a holiday home, or be rented out some of the time as a source of income. Alternatively, you may have a large sum of money to invest and decide to sink it into a property so you can obtain some practical use from it while it (hopefully) increases in value. A second home purchase may even be short-term, if you fancy making money from property developing.

Decide up front what your main reasons are for buying a second home, as these should determine your choice of property.

What are the additional costs of buying a second property?

The property that you consider your main home is known as your primary residence (or your ‘Principal Private Residence’ in taxman-speak). Any additional property you own (including buy-to-let property) is known as a secondary residence.

When you buy any property, you have to pay stamp duty land tax on the purchase. When you buy a secondary residence, you have to pay an extra 3 per cent surcharge on top of the usual stamp duty. Unlike first home stamp duty, it includes properties under the value of £125,000.

A secondary residence is also subject to capital gains tax (CGT) when you sell it, if its value has increased since you bought it. Only the growth in value is taxed, and your CGT allowance will reduce the taxable amount. If you’re selling, ask your financial adviser or accountant to help you work out how much you may need to pay.

How do I let out my second home?

Even if you didn’t start with buy-to-let in mind, you may decide to let your second home so that it generates income rather than sitting empty (this can also be a good way to keep the property maintained, if you pick responsible tenants). However, to do this you’ll need to remortgage the secondary residence to a buy-to-let mortgage, as you can’t let a property if it’s on an ordinary homebuyer’s mortgage.

Alternatively, you could let out your current home and move into the second property yourself. Again, this would mean switching the first home to a buy-to-let mortgage.

What is ‘let-to-buy’?

Not everyone has heard of this option, but essentially it means letting out the property you currently live in so that you can purchase a new place. You might try this if you’re struggling to sell your current home, or if you simply want to keep it as an investment.

Another reason for let-to-buy may be to free up cash for a deposit on the secondary residence. Assuming you owned enough equity, you could remortgage your current home to release some of that value as a cash sum. This can be both complex and risky, however, so consult your mortgage adviser about the practicalities.

Can I make money as a property developer?

One popular reason for buying a secondary property is to profit from a strong housing market. The usual approach is to buy a relatively cheap property (probably one that needs a lot of work), carry out renovations, and then sell it on quickly as a finished product. During a property boom this can be a very lucrative practice, but it carries high risk – if the market suddenly stalls or crashes (as has frequently happened in the past) you can lose a huge amount of money and be left with a half-finished home you can’t sell.

If you’re tempted by this route, aim to have a safety margin to cushion you if prices don’t rise as you hoped, or if the property takes longer than expected to resell. Also factor in the costs of renovation (and remember that estimated costs usually rise considerably). But if you’re a DIY fanatic and enjoy a big project, talk to your mortgage adviser about making it happen.

What about a holiday home?

Buying a property specifically for your holidays has many attractions, if you love a place enough to go there year after year. And when you’re not using it yourself, you can rent it out to other holidaymakers – and the good news is that you won’t need a buy-to-let mortgage for this (it can be a normal residential mortgage if you only plan to let it for a few weeks a year; if you plan to let it more regularly, you may need a holiday let mortgage).

Renting out your holiday home to guests may have tax implications, so discuss this with your financial adviser. On the plus side, you may be able to claim certain allowances and reliefs if you let out the home for more than 105 days a year.

Some people choose a purpose-built property to save on tax and avoid anger from local residents who feel they’re being forced out of their native home. However, some purpose-built properties don’t have planning permission to be residential all year round, which could affect your future if you want to move there permanently someday.

I’m helping a family member onto the property ladder...

If you’re a homeowner and you are buying a home with a relative, this is counted as a secondary residence and you’ll have to pay the stamp duty surcharge. For alternative options on how to help your children buy a first home, see our section on The Bank of Mum and Dad.

I’m buying a second property to start a business...

If the property you’re buying is only partly for business purposes and also partly residential, then it will be classed as a mixed-use property. A mixed-use property will mean lower stamp duty, though you will of course have to pay other taxes and higher business rates.

Having second thoughts?

A good rule of thumb is: if you took care buying your main home, then you should take double the care when buying a secondary residence. Start by finding a mortgage adviser who specialises in this area.

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