Whether you’re looking for somewhere to enjoy holidays or an investment opportunity, buying a second home requires financial planning and a thorough understanding of the process.
We’ve researched the process to help you navigate what can be a complex house buying journey.
Securing finance for your second home
If you have the cash to buy your second home, the process is straightforward. Simply make an offer. And when all the legal paperwork is in place, transfer the cash.
But what happens when you need to raise finance to buy your second home? If you already have a mortgage for your primary property, the process can be complicated.
You will need to demonstrate to the bank that you can comfortably afford the repayments on both your home loans. In most cases, you’ll need to demonstrate you have the required income first. You can’t, for example, tell the lender that the rental income from your holiday home will cover the repayments. After all, holiday rentals are seasonal in nature. There may be long periods of the year when you receive little or no income from the property.
You might be able to secure finance against any equity you have in your primary property (the home you live in). Buyers can often obtain favourable terms if they have significant collateral. But you’ll still need a sizeable deposit — perhaps a lot more than the five per cent average.
Paying tax on a second home
You’ll have to pay stamp duty when you buy your second home — regardless of the price you pay. The rate is 3% on properties up to £125,000. The rate increases on a sliding scale as follows:
- 5% for properties over £125,000
- 8% for properties over £250,000
- 13% for properties over £925,000
- 15% for properties over £1.5m
For tax purposes, you must decide which is your main home. If you choose to sell your second home, and make a profit in the process, you’ll have to pay capital gains tax. However, it’s important to get advice from an accountant. You can offset any more you pay for agent’s fees, legal costs and stamp duty against any profit you make. This means you probably won’t pay tax on the total amount of profit — just the net profit you make after deducting all your expenses.
Letting your second home
Before you buy a home to let, investigate the local rental market. You need to be certain that the rent you can achieve will cover your mortgage repayments and expenses.
You will also need to register for self-assessment tax returns. Even if you don’t make any profit, file a return anyway. List all your expenses, and keep records of everything.
As a tenant, you have certain legal obligations to fulfil. For example, you’ll need to pay for an annual gas safety inspection. You’ll need to attend to repairs as quickly as possible. And you’ll also need to buy landlord’s insurance cover.
There are usually several steps you need to take before you can list your second home in the rental market. As well as fulfilling your legal obligations, you may need to make cosmetic improvements. List all of the costs involved BEFORE you buy the property. The potential return on your investment may make the entire endeavour unprofitable.
However, if your goal is to simply cover costs until you can sell your second home for a profit, breaking even might be sufficient.
If you’re left with two homes and need to sell one of them quickly, Flying Homes can help. We buy property fast, and for up to 100 per cent of market value. Buying a second home can be risky, but we’re here to help if things go wrong.