Buying a Second Home – The Definitive Guide

Published on November 4, 2015 by Danko Puskaric in Buying, News

Buying a second home is something that many people decide to do and for a wide variety of reasons. Some want to buy a second home as a retreat so that they can enjoy a change of scenery whenever the mood takes them. Others look at buying a second home with a new partner or on their own and then renting out their first home.

Whatever the reason for buying a second home, it is important to ensure that you know what’s involved, as otherwise things can become quite complicated.

Doing some research into how to buy a second home can really pay off in the long run, as you will know exactly what to expect and can make a more informed decision with regards to whether buying a second home is the right move for you. Experts advise that you should only ever consider investing in a second home if you are able to comfortably meet all of your other financial commitments as otherwise you could find yourself on a financial downwards spiral and could end up losing a lot of money as well as a lot of sleep.

If you do decide that you are in a position to take this step, there are various things that you need to consider. This includes things such as how you will find the purchase of your second home, whether your existing or new home will be classed as your primary residence, and what you plan to do with the property that is not your primary home.

Sorting out a second home mortgage

Sorting out the finances for your second home will be one of the primary things you need to look at unless you are in a position where you can pay cash for the property outright and therefore will not require any other finance. One thing that you need to remember is that if you do need finance to fund the purchase of a second home you will need good credit, as banks have become far more stringent in terms of who they will lend to since the days of the global financial crisis. You also need to bear in mind that the fees and costs involved in the purchase of a second home will be similar to those that were involved in the purchase of your main home, which means mortgage, solicitor fees, valuation fees, and stamp duty if applicable. You should also make sure that you will be able to afford to keep on top of bills payments for a second home, such as insurance costs, heating and maintenance costs, council tax, and similar. When it comes to council tax you may be able to get a reduced rate as a second homeowner.

Many people who want to buy a second home will need to approach a lender that offers second home mortgages. Getting a mortgage for a second home isn’t always easy and banks will need to know that you are able to afford the necessary repayments, so you should make sure you have all of your facts and figures to hand when making an application for a second property mortgage. When it comes to finding a suitable lender for a second mortgage there are various things you should consider, such as:

The maximum amount the lender will offer: The amount you are able to borrow from a lender will vary based on the loan to value ratio that they offer, with some offering a higher percentage of the value by way of a loan than others. You therefore need to compare what different lenders are able to offer and whether you have an adequate deposit to put down on the second property based on this.

The rate of interest charged: Another thing you will need to look at is what rate of interest the lender will charge on your second mortgage loan, as second home mortgage rates can also vary from one lender to another. The rate charged can depend on a range of factors, such as your financial status, your credit history, the amount you want to borrow, the term of the loan, and various other factors. Make sure you compare interest rates in order to try and secure the most favourable one on your loan.

The reputation of the lender: If you are looking at using a lender that you have not dealt with before and it is not one of the well known banks, you should take some time to look at the reputation of the financial institution as well as whether it is regulated by the Financial Conduct Authority. Look at reviews of the modern amongst other things, as this will enable you to make a more informed decision with regards to which lender to go through.

How long the process takes: The amount of time it takes for a second mortgage to go through can also vary from one lender to another. It is well worth looking into the average timescales so that you can determine whether you are likely to get the money you need through on time.

Another thing that it is well worth doing is using the various online mortgage calculator tools that can be found online, as this will enable you to get an idea of what your repayments will be on a second mortgage based on the rate of interest you are likely to be charged, the amount of time you take the loan over, and the amount of deposit you will be putting down. You can then work out whether this will be viable based on your current income and outgoings. If you are planning to rent out your current property, bear in mind that you will be getting a rental income from that as well and this can be factored into the overall income.

Looking at capital gains tax on second homes

There are a number of costs involved in purchasing a second home, including stamp duty, which is one of the taxes that you will have to pay. This is paid when you purchase the property and the current rate stands at 1 percent of the purchase price for properties between £175,000 and £225,000 and 3 percent of the purchase price on properties of a higher value. Anything under the minimum threshold is exempt and stamp duty will not be applied.

Another major tax consideration that you have to think about if you are looking at buying a second home is the payment of capital gains tax, which you would have to pay if you decided to sell the second home. If you sell a second home for a profit and it is not your main residence you may have to pay capital gains tax on it. The amount of capital gains tax you have to pay will depend on various factors such as your circumstances, the amount of profit you make, and other factors. Remember, you do not pay capital gains tax on the sale of your primary residence so you need to ensure you work out which of your two properties will be classed as your primary home. Also, bear in mind that there are two brackets for capital gains tax depending on whether you are a basic taxpayer or a higher rate tax payer. For the former, capital gains tax is paid at 18 percent whereas for the latter it comes in at 28 percent, which is obviously a considerable difference.

One thing that you should note is that special tax rules apply if the property has been a main residence, so you could help to reduce your capital gains tax bill by using the property as a main residence for a period. This will enable you to get capital gains tax relief on the final eighteen months (previously three years) before you sell. However, it is also important to remember that tax rules and regulation, which includes capital gains tax, can change on a regular basis so you should always make sure you do some checks and find out what the most up to date rules are when you are considering selling a second home. Capital gains tax on second homes can also be very complicated, so if needs be it is well worth seeking professional advice from experts to ensure you have all of the information and assistance you need.

Another notable fact is that HMRC has been actively targeting people with regards to second home capital gains tax. This is something that has been ongoing for the past couple of years, with the tax office determined to clamp down on attempted tax evasion when it comes to capital gains tax. This is yet another reason to ensure that if you do decide that you want to sell your second home you are fully aware of what needs to be paid in terms of capital gains tax by consulting an expert and providing the necessary information for this to be properly calculated.

About the author

Danko is IT professional with big passion about properties from young age. He is based in Manchester where he actively investing in properties and helping others to sell their houses.