Approximately 10% of British people possess a second property, either in the UK or abroad. The majority of these properties are buy-to-let, but some are holiday homes, holiday lets, or second homes. If you’re considering buying a second property, you’ll need to consider the implications of the additional stamp duty land tax. This article will teach you all you need to know about buying a second property in the UK, whether it’s a holiday home or a buy-to-let.
Why Do You Need a Second Property?
People buy more than one home for a variety of reasons. Perhaps you work in the city but like country life, and you want space and fresh air on weekends but a local location to stay in during the week. Similarly, your employer may require you to travel to different parts of the country. A second home can either be used as a holiday home or rented out for a portion of the time as a source of income.
Alternatively, you may have a significant quantity of money to invest and elect to put it into a property so that you may utilise it while it (hopefully) appreciates in value. If you want to make money from property development, a second home purchase could even be a short-term investment. Decide ahead of time what your primary reasons are for buying a second home, as these will influence your property selection.
What you should know before Buying a Second Property
A second home is owned by almost one million people in the United Kingdom or roughly 4% of all households.
However, if you are thinking of buying a second property, there are a few things you should be aware of beforehand.
We’ll go into more detail about this on this page, but here’s a list:
- Second homes are subject to a 3% stamp duty surcharge on top of the standard rate of stamp duty tax.
- If you intend to take out a mortgage, you will need a deposit of at least 15% (or 25% if you intend to rent out the property).
- If you already have a mortgage, you must meet severe financial standards to obtain financing for a second home.
- Mortgage rates are typically higher when purchasing a second home.
- If you intend to rent out the property, you must obtain a buy-to-let mortgage.
- There will be maintenance charges once you buy the property.
- If you later sell a second home for more than you bought for it, you may be subject to capital gains tax.
What is the Best Approach to Buying a Second Property?
Mortgage lenders typically have stringent restrictions for those buying second homes, so it is preferable if you have paid off the mortgage on your primary home.
The larger the deposit you can make, the lower the interest rate you would receive on a mortgage, and hence the less money you will have to pay back overall. It’s best to have as large a deposit as possible saved up.
Because there are so many variables to consider, it’s probably a good idea to consult with a mortgage expert.
The Benefits and Drawbacks of Buying a Second Property in the UK
Pros
- When you hold a second property as a long-term investment, you can be confident that its value will rise and provide you with the return you seek.
- You might be able to rent out your property to tenants. A rental income helps to keep the mortgage paid while also providing a little amount of extra money.
- Your holiday home could be your second home. You might let it out intermittently when you’re not using it, but otherwise, you should be free to use it and invite relatives and friends to use it.
Cons
- Lenders have been more stringent in their decision to provide enough money for a new mortgage.
- The 3% stamp duty extra significantly increases the amount of money needed to purchase a second home.
Mortgage interest relief has been capped at 20%, which might have a significant impact if you choose to be a landlord. This judgement disproportionately affects higher-rate taxpayers, who previously received tax relief at a rate of 40%.
The Costs of Buying a Second Property
There are standard charges associated with a primary house, such as legal fees, building insurance, and an arrangement fee.
You should also think about:
#1. Stamp duty
When purchasing a second home or a buy-to-let property, stamp duty is more than when purchasing a primary residence.
A 3% stamp duty extra is required for “additional properties.” This is in addition to the stamp duty tax.
#2. Monetary bills
Make certain that you will be able to pay a second set of bills, such as:
- Insurance
- Energy
- The local government tax
- Maintenance expenditures (thought a broken boiler in the dead of winter was bad? Consider two broken boilers in the dead of winter.)
- The cost of decorating
#3. Local government tax
On the brighter side, you may have to pay less council tax. This is because some local governments provide a discount for second homes, and most holiday homeowners receive a 10% discount.
#4. Deposit on a buy-to-let mortgage
When applying for a mortgage for a second home, you will be required to explain the property’s purpose.
If you intend to rent out your second property, you will require a buy-to-let mortgage or a holiday-let mortgage.
You’ll need:
- A greater down payment than you made on your first home (a typical requirement will be at least a 25 percent deposit)
- A high credit score
- The desire to go through the entire house-buying procedure once more
#5. Buying a Rental Property
If you intend to rent out a property for an extended period of time, you must apply for a buy-to-let mortgage.
Keep in mind:
- You will be required to put down around a 25% deposit (although it can vary between 20 percent -40 percent )
- Most BTL mortgages are interest-only, which means that you are only paying interest and must repay the loan in full at the end of the mortgage period.
- Interest rates are typically higher than on ordinary mortgages.
- The amount of BTL mortgage available will be largely determined by the amount of rental income generated by the property.
- Lenders will want to see that the rent is sufficient to cover the mortgage interest by a predetermined amount. This is intended to provide some protection against any additional costs or future rate increases.
The Financial Conduct Authority does not regulate buy-to-let mortgages (FCA)
So, calculate how much monthly rent you will receive from tenants to ensure that it makes financial sense.
#6. Buying a Holiday Home
If you wish to buy a holiday home and do not intend to rent it out, you should be able to qualify for a standard mortgage. However, keep in mind:
Your lender will want to know that you can afford both your present mortgage and the payments on a second mortgage.
To offer the bank peace of mind, you will be required to put down a higher deposit, most likely around 15% of the property’s value.
In addition, you may have to pay significantly higher interest rates and fees than you did on your first mortgage.
#7. Renting out your second vacation home
If you intend to rent it out, you must apply for a specific sort of mortgage (known as a holiday-let mortgage), which requires a larger deposit of 25%.
Lenders offering these types of mortgages include:
- The Principality Building Society
- Leeds Building Society
- The Ipswich Building Society
A good mortgage adviser should be able to advise you on the finest lenders for these specialised loans.
#8. Levels of rental income
Lenders will consider if the property can provide a rental income that is between 125 percent and 145 percent of the mortgage interest payments.
As an example:
A deposit of £50,000 is required to buy a holiday let worth £200,000.
Rental revenue should be expected to be at least £8,500 per year (assuming a mortgage interest rate of 4.5 percent )
The way a holiday-let mortgage is taxed is a significant advantage.
A furnished holiday rental that is open to vacationers for at least 210 days per year is classified as a business. This means that you can deduct all of your expenses from your rental income before you are taxed. This covers the interest on your mortgage.
Stamp duty on Buying Second Property
As previously stated, there is a stamp duty extra when purchasing a second property, so you will pay more than the usual rates.
When buying a second property, you must pay a 3% extra, which quickly mounts up on top of the purchase price.
It’s worth noting that if your ideal second home is a houseboat or trailer – in other words if it “moves,” you won’t have to pay any stamp duty.
Is it possible to avoid paying stamp duty on my second home?
Stamp duty might make buying a second property too expensive. Typically, it is an inevitable tax that must be paid as part of the purchase of a property. Nonetheless, there are some restricted exclusions that you may be able to use to avoid paying it.
Furthermore, if you decide to sell your first home, you may be able to reclaim some of your stamp duty.
Methods for avoiding stamp duty on your second property
#1. Buy a camper, RV, or houseboat.
Stamp duty is not automatically levied on all types of property. If you buy a certain type of house, you will not be charged any stamp duty, regardless matter how much it costs to buy. Motorhomes, mobile homes, caravans, and houseboats are all free from this tax.
#2. If the property will be used by a family member, place the deed and mortgage in their name.
Assume you want to buy a second property for a family member to live in. In that instance, you can avoid paying second-home stamp duty by not having your name on the deed. There are three main techniques to accomplish this:
- As a gift, give them money for the deposit.
If you want to buy a home for a child or elderly relative, one option to avoid paying second-home stamp duty if you already own property is to give your family member money for the deposit. If they then meet the requirements for applying for a mortgage, the property (and the mortgage for it) will be entirely in their name. It will be their primary residence, not your secondary residence.
2. Make an application for a family offset mortgage.
A few banks provide this type of mortgage, which operates by allowing you to deposit a portion of your own funds into a specific bank account. The lender will then utilise the funds as a down payment for a family member to buy a home and apply for a mortgage. The savings account balance will not be impacted. Instead, it will sit safely for several years before being returned to you, assuming your family member has been consistent with their monthly repayments.
3. Sign on as Guarantor
You may have come across this term while looking for a rental. A guarantor is simply a third party who can guarantee a mortgage or loan on behalf of another person (for example, a family member). As a guarantor, you will not be the legal owner of the property (it will not be classified as a second home). You will, however, agree to assume responsibility for covering the mortgage payments if your family member is unable to do so for whatever reason.
#3. Purchase a property for less than £40,000
Buying a property worth less than £40,000 is another good strategy to buy paying second-home stamp duty tax. This may be possible depending on where you’re buying and the size of the property.
#4. Purchase a buy-to-let property as a first-time buyer.
While it is technically impossible for a first-time buyer to purchase a second home, they might buy in a buy-to-let.
Because buy-to-let properties are frequently purchased after the purchase of a principal dwelling, they are subject to second-home stamp duty. If you are a first-time buyer, you will not have to pay second-home stamp duty. Furthermore, you should be able to take advantage of first-time buyer stamp duty rates.
The sole exception is when buying a buy-to-let property with someone who is not a first-time buyer. You’ll then be taxed as a single unit, which means you’ll have to pay the second-home stamp duty.
Refund of stamp duty
Even if you do not intend to buy an “extra” property, you must pay the 3% stamp duty premium if you buy a new home without first selling your previous one.
However, if you sell the old property within three years of buying the new one, you may be eligible for a refund of the stamp duty premium.
But be careful, the rules are complicated. In some circumstances, you are treated as though you own property even if you do not (because, say, your spouse does).
Buying a Second Property FAQs
How much deposit do I need to buy a second home?
In most cases, a 15% down payment is sufficient to acquire a mortgage for a second property. However, if you have a higher deposit, you will not only find it easier to obtain a mortgage because there will be more options available to you, but you will also have access to better rates and may be able to obtain the mortgage on an interest-only basis.
Can a husband and wife have two primary residences?
It is completely lawful to be married filing jointly with different residences as long as your marital status matches the IRS definition of “married.” Because of life’s circumstances or personal decisions, many married couples live in different homes.
How long do I have to live in a second home to avoid capital gains tax?
You are only required to pay CGT on property that is not your primary house – that is, your main home where you have resided for at least two years. Those with second homes and Buy To Let portfolios, therefore, should keep their ears to the ground.
