Guide to buying second home – A Second residence, Holiday Let or Buy to let
This guide covers everything you need to know about buying a second property, whether it’s a holiday home or a buy-to-let.
What to know before buying a second home
Almost three-quarters of a million households in England had a second home, around half a million in the UK, according to official figures (source). If you are considering buying a second property, there are a number of things you should be aware of first.
We go into these in more detail in this article, but here’s a list:
- Second homes incur a stamp duty surcharge of 3% on top of the normal rate of stamp duty tax (source).
- You may need a deposit of at least 15% (or 25% if you plan to rent the property out) if you plan to take out a mortgage.
- If you have an existing mortgage, you will have to meet strict affordability requirements to take out a loan on your second home.
- Mortgage rates are usually higher to buy a second home.
- If you want to rent out your second property you have to take out a specialist buy-to-let mortgage.
- Once you buy the property, there will be maintenance costs.
- If you later sell a second home for more than you originally paid, you might be hit with a Capital Gains Tax bill.
What is the best way to buy a second property?
Mortgage lenders tend to have strict requirements for people buying second homes. It may be easier to buy a second home if you have repaid you have repaid the mortgage on your main home, however its still possible to buy a second home if you still have your mortgage.
The higher the deposit you can put down, the lower the interest rate you will get on a mortgage, so the less money that you will have to pay back over all. It’s best to have as big a deposit saved up as you can.
As there are lots of factors to consider, it’s worth speaking with a mortgage broker like Goldmanread.
What size deposit do I need for a second home?
Buying a second home will likely stretch your finances and is seen as an investment property which is why you tend to need a larger deposit to buy a second home than you would for your first.
The lender will want you to have a decent chunk of equity in the second property to be comfortable taking on the risk.
- You may need a deposit of at least 15%
- Around 25% deposit if you want to rent the property out
- Closer to 30% if you want to secure a Holiday Let Mortgage.
Is buying a second home a good investment?
It all depends on your circumstances, how much you spend on the property, the research you have done and what you plan to do with the property as to whether it is a good investment.
If you are buying a second home and plan to rent it out, it could be a good source of income, provided the rent you charge is higher than the mortgage repayments.
If you are buying a Holiday home just for your benefit, it’s perhaps not such a great investment because you will be increasing your outgoings.
But you could see it as a way of investing in your future holidays and something to sell in the future.
It’s also the case that you some Holiday Let mortgage providers will let you live in the property for a certain amount of weeks a year as well as renting it out when you are not using it.
Pros and cons of buying a second home in the UK
Here are some of the main pros and cons:
- When you own a second property as a long term investment, at some point, its value may well rise and give you the return that you’ve been looking for.
- You could let out your property to tenants. Rental income keeps the mortgage paid and may provide a modest extra income at the same time.
- Your second home could be your holiday home. You could let it out sporadically while you’re not using it, but otherwise be able to use it yourself and invite family members and friends to use it.
- Lenders have become increasingly strict when choosing to lend enough money for a new mortgage.
- The current 3% stamp duty surcharge really adds to the finance required for buying a second home.
- Taxation on Mortgage interest relief has been restricted.
Costs of buying a second home
There are a few differences in the way you purchase a second home in the UK compared with how you bought your first or main home. This is mainly to do with tax and mortgages.
Buying a second home can bring in a rental income – or give you somewhere to relax with loved ones
Costs of buying a second home
There are the usual costs that you paid with your primary residence, including legal fees, building insurance and an arrangement fee.
You will also need to consider:
1. Stamp duty
Stamp duty is more expensive when you buy a holiday home or a buy to let property than buying your main home.
For “additional properties” you currently have to pay a stamp duty surcharge of 3%. This is charged on top of normal stamp duty tax.
Make sure you will be able to keep on top of a second set of bills, such as:
- Council tax
- Maintenance costs (thought a broken boiler in winter was bad news? Imagine two broken boilers in winter)
- Decorating costs
3. Council tax
On a happier note, you may pay less council tax. This is because some local authorities offer a discount for second homes and most holiday-home owners get a 10% reduction.
4. Buy-to-let mortgage deposit
When you apply for a mortgage for a second home, you will have to explain the purpose of the property.
If you plan to rent out your second property, you will need a buy-to-let mortgage or a specialist holiday let mortgage.
You will need:
- A larger deposit than you did with your first home (a typical requirement will be at least a 25% deposit)
- A good credit score
- The spirit to go through the whole house-buying process again
5. Buying a rental property
If you have plans to rent out the property long term, you need to apply for a buy-to-let mortgage.
Bear in mind:
- You will have to put down around a 25% deposit (although it can vary between 20%-40%)
- Most BTL mortgages are interest-only, meaning that you aren’t paying down the capital amount only the interest, and will have to repay the loan in full at the end of the mortgage term
- Interest rates will usually be higher than for standard mortgages
- The level of BTL mortgage available will largely depend on the amount of rental income that the property will generate
- Lenders will want to see that the rent will be adequate to cover the mortgage interest by a set amount. This is designed to give some cover for any other costs or future rate rises
- The Financial Conduct Authority does not regulate most Buy-to-let mortgages.
So do your sums about how much monthly rent you will receive from tenants to be sure it makes financial sense.
What if I am an accidental landlord?
A buy-to-let mortgage is also worth considering if you become an “accidental landlord”. It might be that you have inherited a property but already own a main home, or you are struggling to sell your home and are forced to rent it out.
These are known as consumer BTL mortgages and unlike those aimed at professional landlords, are assessed according to the same strict affordability rules as a residential mortgage and regulated by the FCA.
If you buy a second home to move into and struggle to sell your previous property, you might want to consider converting your residential mortgage on the first property to a buy-to-let one.
If you don’t switch, you will at least need to ask your lender for “consent to let”.
Would I get tax relief?
Since 2017, tax relief has been gradually phased out. Since April 2020, you can’t deduct any of your mortgage interest payment from your rental income before paying tax (source).
Instead, your interest payment will qualify for a 20% tax credit. Higher-rate taxpayers are hit particularly by this ruling as they previously received tax relief at 40%.
Buying a holiday home
If you want to buy a holiday home and have no plans to rent it out then you should be able to apply for a normal mortgage. Although, bear in mind:
- Your lender will want to know that you can afford both your current mortgage payments as well as those on a second mortgage.
- To give the bank peace of mind you will be asked for a larger deposit, probably around 15% of the property value.
- You may also have to pay slightly higher interest rates and fees than on your first mortgage.
Renting out your holiday home
If you have plans to rent it out you will need to apply for a special type of mortgage (called holiday-let) for which you’ll need an even bigger deposit of 25%.
These types of mortgages are available from lenders such as:
- Principality Building Society
- Leeds Building Society
- Ipswich Building Society
A good mortgage broker should be able to guide you around which lenders are the best for these specialist loans.
Rental income levels
Lenders will look at whether the property will be able to provide a suitable level of rental income. Typically the lender will apply a notional or assumed interest rate in assessing this.
A major perk of a holiday-let mortgage is the way it is taxed.
A furnished holiday let that is available to holidaymakers for a minimum of 210 days per year is classed as a business. This means you can deduct all your expenses from your rental income before you are assessed for tax. That even includes the interest you pay on your mortgage (source).
Your mortgage options
Be aware that your mortgage options may be limited in some cases:
- Some lenders won’t let you borrow on short-term lets like Airbnb because the high guest turnover is a risk
- Most lenders will not offer mortgages for properties on holiday parks either
If you are thinking of joining the army of Airbnb hosts, lenders with suitable mortgage options include:
- Tipton & Coseley Building Society
- Paragon Bank
- Axis Bank
- Market Harborough Building Society
- Furness Building Society
Buyers should check that there are no local authority restrictions on using properties for Airbnb.
Second homeowners who plan to use their property as their personal holiday bolthole but then decide to rent it out will have to apply for a “consent to let” from their mortgage lender. This could come at a price – either a fee or a higher interest rate.
If you’re not granted permission, but you’re set on renting out your property in this way, then you may have to remortgage. Beware that you may face an early repayment charge if you remortgage early.
Stamp duty on second homes
As already highlighted, there is a stamp duty surcharge when you buy an additional property, so you will pay more than the standard rates.
When buying a second home, you have to pay a 3% surcharge, so the cost really
Here is a stamp duty on second homes calculator from the government website which can help you work out how much you might have to pay.
Note: if your dream second home is a houseboat or caravan – in other words, it “moves” – you do not have to pay any stamp duty.
Stamp duty refund
Even if you are not intending to buy an “additional” property you will still have to pay the 3% stamp duty surcharge if you buy a new home but don’t manage to sell your old one first.
However, you may be entitled to a refund on the stamp duty surcharge if you sell the old property within three years of buying the new one.
Be careful though, the rules are complex. In some cases, you are treated as owning a property even though you don’t (because, say, your spouse does).
Capital gains tax on second homes
Bear in mind that if you are looking at buying a second property or secondary residence, you will have to pay capital gains tax if you eventually decide to sell it.
The amount you pay will depend on your circumstances and how much profit you make.
You’ll pay tax on your “chargeable gain”. This is your gain minus any Private Residence Relief you’re eligible for.
You get full relief on:
- The years you lived in the home
- The last nine months you owned the home, even if you were not living there at the time
If you sold the property between 6 April 2014 and 6 April 2020, you get relief for the last 18 months you owned it. (https://www.gov.uk/tax-sell-home)
You do not have to pay capital gains tax (CGT) on your main home so it is crucial you work out which of your two properties will be classed as your main residence.
There are two brackets for capital gains tax:
- If you are a basic-rate taxpayer, capital gains tax is 18%
- For a higher-rate taxpayer, capital gains tax is 28%
You can use the government’s capital gains tax calculator to work out much tax you’d need to pay when you sell a property.
Note that if you only own one home and you’re disabled, in long-term residential care or sold the property before 6 April 2014, you get full Private Residence Relief for the last 36 months you owned it.
YOUR HOME MAY BE REPOSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.