Buying a second property? Here’s all you need to know

11 December 2020 | Investment

For anyone looking to purchase a second property, the experts at regulated fast house sale site Good Move have provided all the essential information you need to know before making the decision to buy.

With research suggesting that one in ten Brits currently owns a second home, mortgage applications at an all-time high, and the property market continuing to boom despite the challenges of Covid, now could be the perfect time to expand your property portfolio if you can afford to do so.

But there are a number of things to consider, from choosing the right mortgage to understanding the extra costs you’ll need to pay, which is where Good Move aims to provide some help.

Here, the firm provides its top tips.  

Choose the right mortgage for you

When buying a second home, you need to ensure you’ve got the right mortgage. Applying to borrow for another property can be a little more complicated than with just one property, as you’ll need to provide concrete evidence that you can afford it. There are a few different options available to you:

  • Buy-to-let mortgage: If you’re purchasing a property as an investment with intentions to rent it, this is the mortgage for you. It typically requires a deposit of 25-40% of the property price.

  • Holiday-let mortgage: For using the home and renting it out for guests for short periods, you can apply for a holiday-let mortgage. The property needs to be available to rent for at least 210 days in the year, and this mortgage often requires a 25% deposit.

  • Buying to use as a holiday home: For personal use, like a holiday or second home, you’ll simply need a regular mortgage. The bank will usually ask for a larger deposit than a regular property though, at around 15%.

Consider Capital Gains Tax (CGT)

Capital gains tax is a charge you need to pay on your second home if it’s increased in value since you bought it. Within a tax year, you are entitled to a £12,300 (2020/21 rate) capital gains tax allowance. Once your profits exceed your allowance, the rate of CGT you owe depends on your tax bracket:

  • A basic rate taxpayer earns up to £50,000 and will pay 18% tax on second property profits after capital gains tax allowances.

  • A higher rate taxpayer earns over £50,000 and will pay 28% tax on second property profits after capital gains tax allowances.

Other costs to consider

There are other important costs to factor in when purchasing a second property, Good Move says.

This includes stamp duty as normal, plus a 3% surcharge. Stamp duty is not currently applicable on homes worth up to £500,000 between now and the end of the stamp duty holiday in March next year (the deadline is March 31 2021, although the pressure is growing on the government to extend this). The 3% surcharge is still owed, but only on the first £500,000 of a home, which has meant savings of up to £15,000 for buy-to-let investors and landlords.

As well as stamp duty, investors need to bear in mind council tax on a second property, although you can sometimes get a discount if you use your second home as a holiday abode. Additionally, ongoing costs including upkeep, repairs, utilities and renovations, and income tax if you’re renting out the property, must also be factored in.

Nima Ghasri, director at Good Move, says: “This year has seen a huge property boom, with the stamp duty holiday and house prices and mortgage applications at an all-time high. Therefore, if anyone has been thinking about buying a second property and is in the financial position to do so, now could be the best time to do it.”

Ghasri adds: “When you are buying a second property, there are many things you need to consider, from choosing the right mortgage to ensuring you’re considering the additional costs necessary when adding to your property portfolio. For anyone considering buying a second property at this time, we hope this advice will help people understand all they need to do before making the decision.”

You can find out more about purchasing a second property here.

This post has originally been featured in Property Investor Today.