Buying a Second Home

There are numerous reasons why individuals may wish to purchase a second home. This might be for the enjoyment of a holiday retreat by the coast, a convenient city bolthole, or to provide a residence for a family member. It could also be intended as a holiday let or a long-term investment for the future.

We have compiled the following guide to elucidate what purchasing a second home entails and how it differs from a standard house purchase.

Can I Buy a Second Home Using Equity?

Yes, it is indeed possible to buy a second property using the equity in your primary home. To secure a mortgage for a second home, you will need a deposit of 25%. A mortgage lender will assess whether you possess sufficient equity to cover the repayments on the second home mortgage. You can determine your available equity by subtracting the outstanding balance on your primary residence's mortgage from its current market value.

Does the Deposit Increase on a Second Home?

Indeed, second home mortgages necessitate a minimum deposit of 25%, compared to the 5-10% typically required for a standard mortgage. You could potentially leverage the equity in your main home by remortgaging and using those funds as a deposit for your second property.

What Kind of Mortgage Do I Need?

You will need to apply for a second home mortgage. These mortgages involve more rigorous financial checks and criteria, as lenders must ensure you can manage mortgage payments on two properties. You may also need a specialised mortgage, depending on your intentions for the second home, such as:

Buy to Let Mortgage: if you plan to rent out the property
Holiday Let Mortgage: if you intend to let the property on a short-term basis to holidaymakers

Is It More Difficult to Get a Mortgage on a Second Home?

Securing a mortgage for a second home is indeed more challenging, lenders are aware that applicants already have significant financial obligations due to their primary residence mortgage. In addition to the larger deposit requirement of 25%, lenders will require proof of a substantial income that can cover mortgage repayments for two properties, they will also consider your age and how long you can maintain your current income level.

How Does Buying a Second Home Impact Tax?

Purchasing a second property has notable tax implications. You will incur a higher stamp duty rate than on your primary residence and will not benefit from the 0% rate on properties up to £250,000. The current rates (as of August 2023) for stamp duty on additional properties are as follows:

Up to £250,000: 3%
£250,001 - £925,000: 8%
£925,001 - £1.5 million: 13%
Above £1.5 million: 15%

Capital gains tax is also applicable, basic rate taxpayers will pay 18% on any increase in value if they sell a property that is not their main residence. The only way to avoid paying capital gains tax on a second home is if the increase in the property's value is less than the individual capital gains allowance, currently set at £12,000.

You will also need to pay council tax on the second home, unless you qualify for an exemption or discount. More information about council tax exemptions can be obtained from your local council.

What Are the Additional Costs Involved?

Purchasing a second property entails all the standard costs associated with buying a home, such as mortgage arrangement fees, mortgage valuation fees, conveyancing costs, and buildings insurance.

Let Us Help with Your Property Search

If you are contemplating purchasing a second home, we at Howards can assist you. Please contact your local branch today!