Get in touch 020 3884 1660

Buying a second home

Our checklist for buying a second home will help you to understand the ins and outs of the process, from remortgaging your existing home to the costs associated with selling a second property.

1. How to buy a second home

Every year, thousands of homeowners decide to buy a second home for a multitude of reasons.

If you’re looking to buy a second property to rent out, you’ll have to opt for a buy-to-let mortgage. View our buy-to-let checklist for everything you need to know about purchasing a home for renting.

If you don’t plan to rent your second home to others and want to keep your original home too, there are two possible ways to go about it: remortgaging your current home or, if you’re an older homeowner, releasing equity from it.

Remortgaging your existing home

For many, remortgaging is the most suitable way of funding the deposit on a second home - or in some cases buying it outright.

There are plenty or remortgaging options out there; when searching for one remember to consider the ‘true cost’ of any deal as opposed to basing your decision solely on the headline interest rate.

It’s also worth noting that there are some restrictions on remortgaging for older borrowers. That said, some lenders will accept borrowers who exceed retirement age so long as they can prove their mortgage is affordable and - as with anyone - their application passes the ‘stress test’.

A ‘stress test’ relates to circumstances that might impact your ability to meet your mortgage repayments, such as interest rates rising or if you lose your job.

Equity release

You can access the equity (or cash) tied up in your home through ‘equity release’ if you’re over the age of 55. You can take the money you release in full or in several smaller amounts. This option is designed to enable older borrowers to unlock their current property wealth to pay for an additional home.

The most common equity release scheme is called a ‘lifetime mortgage’. Interest on the lump sum of this type of mortgage builds up over time and is repaid when the borrower goes into long-term care or dies.

Going down the equity release route can affect your entitlement to state benefits and will reduce the value of your estate, so we’d recommend seeking professional advice first.

2. I’m buying a holiday home

Purchasing a property for holiday use has many benefits, particularly if it’s in a location you love and visit regularly. The good news is there’s also the option to let it out to holidaymakers when you’re not there to make some extra cash.

If you only plan to let your holiday home out for a few weeks a year, you won’t need a buy-to-let mortgage - a standard residential one will suffice. However, if you plan to rent it out more regularly you might need a ‘holiday let’ mortgage.

A holiday let mortgage is designed for people looking to borrow money to purchase a property that will be let out on a short-term basis to tourists. This type of mortgage enables you to potentially charge more to customers than you would do to long-term tenants in a buy-to-let property.

Do your research

Renting out a holiday home will affect the tax you pay as you’ll have to declare this income on a Self Assessment tax return each year, so be sure to discuss the implications with your financial adviser first. If you plan to rent it out for more than a certain number of days a year, you could be eligible for specific allowances and tax reliefs.

Keep in mind that some purpose-built holiday homes don’t have the planning permission to be residential all year round so check this first - particularly if you’re considering moving in permanently one day.

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

If you’re already a home owner and you want to buy a second property for a relative, it will be classed as a second home. As such, you’ll have to pay a surcharge on top of the usual Stamp Duty and you’ll be subject to capital gains tax (CGT) when you eventually sell.

There are other ways of helping a family member to buy a home. The following suggestions will help get them onto the property ladder themselves:

  • Help out towards their deposit with a cash gift or an informal loan - the larger their deposit, the more likely they are to be accepted onto a mortgage.
  • Be a guarantor for their mortgage - guarantor mortgages are designed for buyers who can’t afford a deposit or their financial circumstances don’t match the mortgage lender’s requirements.
  • Look into first-time buyer government schemes like Help To Buy, Shared Ownership, and the Starter Home Scheme.

For more information, check out our help for first-time buyers checklist.

4. I’m purchasing a second property to start a business

If you’re planning to buy a property for part-business, part-residential purposes, it will be classed as a mixed-use property (sometimes known as semi-commercial). This means the Stamp Duty will be lower but you’ll have to pay additional taxes and business rates.

5. Can I rent out my second home?

The answer is yes, but you’ll need a buy-to-let mortgage. Your mortgage lender will want details of the rental income you plan to receive together with details of your financial history and other income to make sure you’ll be able to keep up with the repayments.

Buy-to-let mortgages are quite similar to residential ones but there are a few key differences:

  • The fees can be significantly higher
  • Interest rates can also be higher
  • The minimum deposit is usually 25% of the property’s value

As with residential mortgages, if your deposit is larger you’re more likely to secure a more competitive deal.

6. What are the additional costs of buying a second home?

If you own more than one property, the one you consider to be your main home is classed as your ‘primary residence’. Any additional property is known as a ‘secondary residence’.

The main additional costs involved in buying a second home come in the form of increased Stamp Duty and capital gains tax (CGT).

Stamp Duty

When you buy a property, you’ll in most cases need to pay land tax (Stamp Duty). With a second home, you’ll normally have to pay an extra 3% on top of each Stamp Duty rate band depending on the value of the property.

For example, instead of paying 0% on the first £125,000 of the property, you’ll pay 3%. And instead of paying 2% on the next £125,000, you’ll pay 5%.

Like primary residence Stamp Duty, you’ll need to pay the tax if the property is worth more than £40,000.

Tax

Secondary residences are subject to capital gains tax if their value has increased when you decide to sell. A financial adviser will be able to tell you how much you’ll need to pay.

7. Can I make money as a property developer?

When the housing market it strong, buying and renovating a property to sell at a higher price can be a very attractive idea. For some, the process of transforming a home into a much-improved version of itself is also very fulfilling.

Despite the potential rewards, it’s important to understand that the decision to move into property development can also be very risky - you could end losing a lot of money if the market crashes and you can’t sell it, for example.

As with any investment, it’s a good idea to have a financial safety net in place in case the market doesn’t perform as well as you expect or it takes longer than expected to sell the property.

As well as the usual costs associated with buying a second property, you’ll need to factor in an estimate of how much the renovations are likely to set you back.

8. Costs of selling the property

So you’ve come to the point where it’s time to sell your second home. Perhaps you’re a developer and the renovations are complete, or maybe you want to release your equity for other things.

When you sell your primary residence or only home, you won’t have to pay any capital gains tax. However, you will have to pay some if any of the following apply:

  • You have another home that could be considered your main residence.
  • You purchased the property to make a financial gain (through development, for instance).
  • You run a business from part or all of the property.
  • You’ve sublet a portion of it.
  • The property includes a lot of land or additional buildings (usually 5,000 square metres or more).

Whatever your situation, speak to your mortgage lender or financial adviser to get the most accurate information for your circumstances.