Journal

What you need to consider when buying a second home

Thinking about buying a second home? From investing your money in property to purchasing a beautiful holiday home, there are many reasons why you may be thinking of taking on another property. But there are areas to carefully think about before you move ahead with the decision to ensure it’s the right option for you.

Second home ownership has been a growing trend in the UK. According to research from the Resolution Foundation, in 2017 one in ten UK adults, or 5.2 million people, owned a second home. Between 2000 and 2017 the proportion of UK adults investing in a second property increased by 30%. Unsurprisingly, around half of second homes were owned by the baby boomer generation.

Whatever the reasons behind your decisions, there are a few things to keep in mind:

1. Your motivations

What are your reasons for wanting to purchase a second home? This is a key question to keep in mind for two reasons. Firstly, an alternative solution may be better suited to you. Perhaps you want to generate an income or a nest egg for the future. While the property may well be the right option in these situations, alternatives, such as an investment portfolio or pension may be better suited. Examining what you want to achieve before you take the plunge is important.

Secondly, should you decide to go ahead with a second property purchase, it’ll help you narrow your focus. The UK property market is huge and shifting through the homes for sale can be cumbersome if you don’t already have an idea of a property in mind.

2. Cash buyer or mortgage?

Of course, how you will pay for your second home is critical.

While you may think it’s simple if you’re using cash, you should take steps to ensure your financial security hasn’t been placed at risk. If you faced a financial shock and needed to access money quickly, do you have other, liquid assets you could rely on?

If you want to take out a mortgage to buy a second home, it can be both an advantage and a disadvantage. While you’ve hopefully proven you’ll make repayments on time through the mortgage on your own home, it can also be viewed as a greater risk. You’ll need to prove that you’ll be able to keep up with all credit liabilities, even if interest rates rise. If it’s a Buy to Let property, you’ll typically need to demonstrate a potential rental yield that is at least 125% your regular payments.

Don’t forget to budget in the associated costs of buying a home too. Much like when buying your main residence, you’ll need to pay for solicitors and surveyors, for example. On top of this, there are the associated running costs of a property to factor in. From insurance to maintenance work, a second property will often require just as much, if not more, investment as your main home to keep it well maintained.

3. Stamp Duty

Whether you plan to rent out your second property or not, you’ll still need to pay the higher rate of Stamp Duty. This can add a significant expenditure when you’re purchasing and may mean you have to set a lower price limit than expected. Below are the bands for Stamp Duty, showing how those of a second home compare to the standard rate.

House price Standard Stamp Duty Second home rate
Up to £125,000 0% 3%
£125,001 – £250,000 2% 5%
£250,001 – £925,000 5% 8%
£925,001 – £1.5 million 10% 13%
Over £1.5 million 12% 15%

 

When it’s time to sell the property, you may also face additional costs too. As the property isn’t considered your main home, you may have to pay Capital Gains Tax (CGT) on the profits made from the sale. CGT can be a complicated area and there are allowances that can be taken advantage of.

4. The long-term plan

When you’re purchasing a second home, it’s a good idea to have a long-term plan in mind. Will you keep it for five years and then sell it? Or do you hope to pass it on to your children one day?

While plans may change, having a rough idea can help you make more informed decisions when purchasing, renovating and maintaining a property. You may decide to limit decorating costs for a holiday home you plan to use for just a few years or property that will be let out, for example. On the other hand, if you view the purchase as a long-term commitment, investing money early on could save you more in the long run.

Are you considering purchasing a second property? Get in touch with us today to understand how it could affect your financial situation and how to make the most of your assets.

Please note: Your home maybe repossessed if you do not keep up repayment on your mortgage. The Financial Conduct Authority does not regulate Buy to Let Mortgages. Levels of taxation may be subject to change and their value depends on the individual circumstances of the investor.

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