January 8, 2024
People buy second homes for all sorts of reasons. You might view a second property as an investment in your retirement, an additional source of income, or even a way to support a family member (such as a child leaving for university).
Whilst it can be a sound investment, you must understand the nuances of purchasing a second home.
Financial Considerations
Of course, as well as the potential for a financial payoff, investing in a second property comes with its own set of financial risks and implications.
Affordability and budgeting
First, you need to consider the affordability of second homeownership. Mortgages on a second home, for example, normally require a larger deposit than those for a primary residence, as well as the additional 3% stamp duty on second homes.
You also need to consider the ongoing budgeting implication of a second set of mortgage payments, property maintenance, insurance, utilities and council tax, or capital gains tax, depending on the intended use of the property.
Unless you have the cash available to purchase a second home outright, you will likely need to take out a mortgage against any second property you purchase. The type of mortgage you take out will depend on the intended use of the property — you may need a residential mortgage or a buy-to-let mortgage.
Mortgage Options and Financing
The type of mortgage you take out will depend on the way you intend to use the property.
Just like when you buy a property with any other mortgage, lenders will take your financial situation into account when deciding whether to offer you a mortgage for buying an additional property. However, the criteria for credit score, income and outgoings may be more stringent on a second mortgage, and it may be worth seeing a specialist mortgage broker to understand all of your options.
If you have a substantial amount of disposable income or have almost finished paying off your first mortgage, you are far more likely to be eligible for a mortgage on a second home.
Residential Mortgage
If you are buying a second property to use yourself (for example, a city residence to avoid commutes during the week, or a holiday home in your favourite part of the country), you will need a residential mortgage.
This is no different from a mortgage on a first home, except that lenders may enforce stricter eligibility criteria.
Buy-to-let mortgage
If you plan to rent out your property — whether as a landlord or a commercial holiday let — you will need to take out a buy-to-let mortgage.
Mortgages on buy-to-let properties usually require a larger deposit, and have a higher interest rate than residential mortgages, though you can choose an interest-only mortgage, to reduce monthly outgoings.
Equity
If you have paid off, or are close to paying off, the mortgage on your home, you may be able to use any equity you have built in your first home to make up the deposit for a mortgage on a second home.
Legal Implications and Practicalities
There are several legal and regulatory restrictions to take into consideration when buying a second home. As well as the usual solicitor or conveyancer fees, there may be additional regulations to consider, depending on how you will use the property. If you plan to let out the property, for example, you will need to follow the guidance and legislation regulating landlords, and you may also be required (either by law or by your mortgage lender) to take out special insurance.
Taxes on a second property
You will need to pay additional stamp duty land tax, known as the stamp duty surcharge, when purchasing a second home, starting at 3% on top of standard rates, depending on the purchase price.
If you are using the home as a second residence for yourself, you will also need to pay second home council tax, and if you are using it as a holiday let you may be able to pay business rates instead of council tax.
If and when you come to sell a second property, you may also be liable for capital gains tax, if it has increased in value.
Uses of a Second Home
There are any number of reasons you may be interested in purchasing a second property, including:
- Investment opportunities (purchasing a second property with the intention to sell it later at a profit)
- Rental income (purchasing a second property and profiting by renting it out as a home to long-term tenants)
- Holiday lets (purchasing a second property and profiting by renting it out as a self-catering holiday home to short-term customers — either privately, or through a company such as Airbnb)
- Personal residence (purchasing a second property to use as an additional home for yourself and immediate family — such as for personal retreats and holidays, or as a base in the city)
- Helping out a family member or friend (purchasing a second property for use as a home for your family member or friend — often for elderly parents or university-going children — either free of charge or for a nominal rental fee)
You might even combine more than one of these uses, for example, purchasing a property for your child to live in whilst they are at university, with the intention of renting part of it out to other students for profit, and a long-term plan to sell at a profit later.
Factors Influencing the Decision
When purchasing a second property, you should consider all factors.
Evaluate whether your financial circumstances would allow you to take out a second mortgage and maintain the property. Consider your plans for the future, and your financial objectives for the property: Are you looking for an additional stream of income, a long-term investment, or something else?
These factors may help you to understand whether a second property is for you — and if it is, what property type and location would best suit your needs. A sleek, city-centre apartment? A multi-room house near a university? A coastal haven in a seaside town?
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Buying a second home isn’t a responsibility to be undertaken lightly. As long as you understand the legal, financial and tax implications though, second homes can be a great investment for many people.
Whether you’re looking for a rental income, a long-term return on investment, or just a personal bolt-hole, acquiring a second property in Yorkshire could be just the answer you’re looking for.