By estimate, around more than one in ten people now possess a second house thanks to the allure of a coastal vacation home or a temporary residence in the city. But there are many things to think about before you buy.
Here, we examine all aspects of the process, including expenses, mortgage alternatives, taxes and how to generate money by purchasing a second property.
First of All, Why Would You Even Want to Have a Second Home?
The Resolution Foundation reported a few years ago that wealth stored in second homes had grown by 50% over the previous 20 years. Nowadays, more than one in ten adults owns a second home. That said, there are a variety of reasons you might be thinking about purchasing a second house.
To renovate and resell in order to become a property developer
To have a working apartment in the city and a weekend hideaway in the countryside
To invest right away in a house or other asset for your kids or ageing parents
To acquire a property in your preferred vacation spot
To better utilise your funds by investing in a second home that would presumably appreciate in value
It's crucial that you are clear on what you hope to gain by purchasing a second property. To choose the best property, you must first decide how you will utilise it. For instance, a second home for your own use can be very different from an investment property you want to use as a vacation rental.
Can You Afford to Purchase a Second Home?
The next thing to consider is what you can afford to buy when you've decided what you want from your second property. You might be able to purchase your second house outright, or you could need a mortgage.
The thing is, you may obtain a mortgage for a second house even if you are still making mortgage payments on your primary residence.
To get a second mortgage, you normally require the following:
A Sizeable Deposit - Normally, you must be able to contribute at least 25% of the property's value.
A Stable Income - You must demonstrate to the lender that you have the financial means to make the second mortgage and mortgage payments on your primary residence.
Information about Any Rental Revenue - If you want to rent out the second property, you must give prospective mortgage lenders information about the anticipated rental income.
A High Credit Score - This is necessary since lenders will look at it before considering you for a second mortgage.
That said, don't forget to compare prices with arrangement fees, valuation, legal, and early repayment costs.
How Do I Get a Second Property Using Equity?
Utilising the equity you have accumulated in your own house is one option to raise the deposit for a second property. Therefore, you may want to refinance your current home rather than take out a new mortgage.
Typically, a second property requires a 25% deposit. In order to free up funds for an average deposit, you would need to increase your mortgage by £54,023, with the average property price in the UK set to be £216,092 in recent years.
That should be the first thing to check if you have that much equity in your home. To determine how much equity you have in your property, subtract the outstanding balance of your mortgage from its current value. You have £350,000 in equity in your property, for instance, if it is worth £500,000 and you still owe £150,000 on your mortgage.
If you have enough equity, you might be able to raise the mortgage on your primary residence in order to free up funds that you could use to buy a second house.
Just remember that if you borrowed an additional £54,000 on a 25-year mortgage with a 2% interest rate, your monthly payments might go up by £229.
If you are an older borrower looking to release some equity, you can consider a retirement interest-only mortgage (RIO). With these, you can only make interest payments on your mortgage until you pass away or enter a long-term care facility. At that point, the house is sold, and the loan is repaid.
What Are the Usual Add-on Costs of Buying a Second Home?
1. Capital Gains Tax on Second Homes
Capital gains tax will also be required when you decide to sell your second home. You will be obligated to pay up to 18% (28% if you are a higher or extra rate taxpayer) of the rise in value to the taxman if it climbs in value above your capital gains allowance, which is currently at £12,000 per person.
2. Council Tax on Second Homes
Also, remember to pay your council tax. Second residences, which are those that are furnished and empty or if the proprietor has a primary residence somewhere else, are subject to payment of this tax. But if your house satisfies specific requirements, you can be eligible for a discount.
3. Stamp Duty on Second Homes
When you purchase a second home, your primary dwelling or principal primary residence is referred to as your original property for tax reasons. Your secondary residence or supplementary property is your second home. When purchasing a second house, stamp duty is more expensive than when buying a primary residence. That said, any property worth more than £40,000 must pay stamp duty.
What Is the Meaning of 'Let-To-Buy'?
You might be forced to purchase a second house because you are unable to sell your primary residence. "Let-to-buy" refers to the practice of temporarily renting out your present residence in order to purchase and move into a new residence.
Purchasing a Second Home and Renting Out the First at the Same Time
You must speak with your mortgage lender if you intend to move into your second house while renting out your primary residence. In such a case, you might need to refinance into a buy-to-let mortgage if your lender forbids renting out your home.
In order to change your policy to take into account that your property is being rented out, you will also need to communicate with your home insurance provider.
Be aware that depending on how long you have rented it out, your first house may be subject to capital gains tax if you choose to sell it in the future.
Buying a Second Home to Help Out a Family Member
It might not be the best option if you buy a second house just to pay for someone else's first house. For stamp duty reasons, it will be treated as an additional property if your name is on the deeds, and an additional 3% tax will be charged. The house can become much more expensive as a result. That said, read about a few alternative strategies for assisting a relative to move up the property ladder.
Indeed, buying a second home can be a great investment, but it's important to understand the basics before you get started. By understanding the pros and cons of owning a second home, you can make an informed decision about whether or not this is the right investment for you in the long run.
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