Why do you want a second home?
There are many reasons why people buy more than one home. Maybe you work in a city but prefer the country life, and want space and fresh air at the weekends but a local place to stay midweek. Equally, your job may take you to different parts of the country. A second home may also serve as a holiday home, or be rented out some of the time as a source of income. Alternatively, you may have a large sum of money to invest and decide to sink it into a property so you can obtain some practical use from it while it (hopefully) increases in value. A second home purchase may even be short-term, if you fancy making money from property developing.
Decide up front what your main reasons are for buying a second home, as these should determine your choice of property.
What are the additional costs of buying a second property?
The property that you consider your main home is known as your primary residence (or your ‘Principal Private Residence’ in taxman-speak). Any additional property you own (including buy-to-let property) is known as a secondary residence.
When you buy any property, you have to pay stamp duty land tax on the purchase. When you buy a secondary residence, you have to pay an extra 3 per cent surcharge on top of the usual stamp duty. Unlike first home stamp duty, it includes properties under the value of £125,000.
A secondary residence is also subject to capital gains tax (CGT) when you sell it, if its value has increased since you bought it. Only the growth in value is taxed, and your CGT allowance will reduce the taxable amount. If you’re selling, ask your financial adviser or accountant to help you work out how much you may need to pay.
Remortgage your property
Rather than taking out a second mortgage, you can remortgage your existing property as long as you own your house outright, or have built up some equity. It’s easy to work out how much equity you have in your property. If you own it mortgage-free, the total value of your house is your equity. If you have a mortgage, your equity is your property’s value minus your remaining mortgage debt.
A number of mainstream and specialist lenders offer remortgages. When comparing costs, it is important to look beyond the headline rate. Arrangement fees, valuation costs and other expenses such as legal fees should be factored into the total cost.
If you still have a mortgage on your first property, check for early repayment charges that could make remortgaging very costly. It could be better to wait until you reach the end of a fixed-term deal to borrow more.
If you are an older borrower, you might consider using an interest-only retirement mortgage to release some equity. These loans allow you to just pay the interest until you die or go into long-term care, after which time the house is sold and the loan is repaid.
Use equity release
Another option for borrowers aged over 55 is equity release. A lifetime mortgage is a type of loan that allows you to access a tax-free lump sum or regular income from the equity in your house without the need to sell. And unlike remortgaging there are no monthly repayments, meaning your retirement income is not affected. Instead, interest on the money you borrow rolls up over time and the loan is typically repaid when you move into long-term care or pass away, and your property is sold.