An idyllic house by the sea. A woodland retreat from the rat-race. Or perhaps a property for a buy to let investment. Nearly 10% of British people now have both feet on the property ladder and own two houses.
There are essential financial and legal factors to consider before purchasing a second home. Whether it is for lifestyle or investment reasons, this short, handy guide will give you the information needed to make buying that property a dream rather than a nightmare.
Bills, bills, bills…
Before looking for your perfect property, it is time for a financial reality check. Two houses mean two sets of bills.
Make a careful assessment of your current outgoings. Add to it the likely cost of utilities, council tax, insurance and maintenance in your hypothetical second home. Can you comfortably afford this?
Mortgages for a second home
When you apply for a mortgage, make the lender aware that it is for a second home. The bank will want to know if you plan to stay in the property, rent it out long-term or offer it for short holiday lets. Depending upon your answer, there are a range of different mortgage options.
If your new home is just for the family, and you will not be renting it out, standard mortgages are available. For your application to be accepted, the lender needs to be confident you can afford both properties. A deposit in the region of 15% and a somewhat higher rate of interest than on a first mortgage is typical.
Holiday-let mortgages are for the leisure rental market. The deposit will be at least 25%, and you need to demonstrate that a substantial letting income is achievable. Typically a lender expects this income to exceed the yearly interest on the mortgage by a factor of 25 to 45%. As a rough and ready guide, anticipate a requirement to generate more than £4000 a year in rental income for each £100,000 borrowed.
The interest paid on a holiday-let mortgage is tax-deductible. A furnished home rented out for at least 210 days a year can be classified as a business. This allows you to offset all legitimate property expenses from the rental income the home generates, substantially reducing your income tax bill.
Be aware that if you generate rental income via Airbnb or similar sites, some lenders will not offer a mortgage. Short-term lets are considered a higher risk as property damage from thoughtless visitors is a possibility. Be sure to do your homework and take advice from your broker. It is wise to check with the local planning authority too whether they restrict the use of properties for Airbnb.
In the case of unforeseen circumstances forcing you to rent out a property initially intended only for personal use, apply for consent to let from your bank. If granted, this may increase your interest rate or incur a charge. If the lender declines to give consent, remortgaging is an option but is likely to come with early repayment fees.
A third mortgage option, if you intend a long term rather than a short holiday rental, is buy-to-let. As with a holiday-let mortgage, a 25% deposit and higher interest rates are the norm. Your lender will need details of anticipated rental income. Study the local property market to establish the rent of comparable homes. The rental income you generate will need to exceed an agreed percentage of your monthly repayments.
As of April 2020, for income tax purposes you can no longer deduct buy-to-let mortgage interest payments from rental income. However, the interest payments qualify for a tax credit of 20%.
An additional property, other than a caravan or houseboat, incurs 3% stamp duty even where the price falls below the customary £125,000 threshold. A further 5% charge falls on the next £125,000 of value and 8% on the final £500,000. There are a number of online stamp duty calculators to find out how much you might be liable for.
Capital gains tax
The sale of a second home incurs capital gains tax. The amount varies both on the profit made and your circumstances. Importantly, you do not pay capital gains on the sale of your main home, only on a property that is not your primary residence.
Deduct solicitor and estate agent fees, stamp duty, and other legal costs from the proceeds of the sale. Also, in the tax year 2020 to 2021, you may deduct a personal capital gains tax allowance of £12,300.
If you pay basic-rate tax, capital gains is limited to 18% of the profit. For those in a higher bracket, the tax is 28%.
Finding your perfect property
With financial and legal factors considered, it only remains for you to live the dream and seek out the second home that’s right for you.