Everything You Need to Know About Buying a Second Property

Roughly 1 in 10 Britons currently own a second home, up 50% in the last 20 years. And with the financial and practical benefits that come with having a second residency, who can blame them? But, like purchasing any home, there are a series of hoops to jump through before you can call a place your own. We’ve covered everything you’ll need to know when buying a second property, from the reasons behind buying one to choosing a mortgage and extra finances involved in a deal.

In this article:

Why might you want to invest in a second property?

There are a handful of reasons why you should consider investing in a second home. Building out your property portfolio comes with a range of practical and financial benefits, such as:

  • Developing a home with the short-term intention of improving its value and selling on.
  • Investing your savings into something practical that will also more than likely gain value over a long period of time. This can also provide a great financial platform for your children later down the line.
  • Buying a second home to rent out some or all of the time as a source of income.
  • Having a holiday home in a beautiful area you often visit. Additionally, you might want to split your time between two places – buying a second property to live in half of the time might make more financial sense than renting or staying in hotels when away from home.

What are the different types of mortgage available when buying a second house?

If you’ve ever wondered how to go about buying a second home, then finding the right mortgage would be the best place to begin. Applying to borrow for another property can be a little more complicated this time round, though, not least because you’ll have to provide evidence that you can afford to buy a second mortgage – this can be especially difficult if you’re self-employed. Depending on your intentions for the property, there may be some slight differences in the mortgages available to you:

Buying to let

If you’re purchasing a property as an investment and intend on renting it out, then you’ll be required to apply for a buy-to-let mortgage. This often comes with a higher deposit requirement, usually around 25-40% of the property price, in order to protect the lender in case of delayed payments often caused by late rent.

Holiday Letting

A holiday-let mortgage enables you to enjoy the property throughout the year, as you would a holiday home, while also renting it out to tourists over short periods. To qualify for a holiday-let mortgage, rather than a buy-to-let, the property must be available for rent at least 210 days in the year. A holiday-let mortgage often requires a 25% deposit due to the high turnover of guests, and is a popular choice if you’re considering renting your property out on sites such as Airbnb.

Buying to use as a holiday home

Buying a property with the intention of using it for personal use, as a holiday or second home, simply requires a regular mortgage. The process will be more or less the same as when you purchased your first property, except the bank with often ask for a larger deposit this time round – usually around 15%.

All there is to know about stamp duty on a second home

Basic stamp duty is a tax payable when purchasing property valued over a certain threshold, and something you’ll likely have experienced when buying your first home. For second home buyers, though, a 3% stamp duty surcharge will also be applicable. This is the case whether you’re buying a holiday home or purchasing with the intention to let.

The stamp duty tax on a second property is dependent on how much you’re buying it for. The England and Northern Ireland model is made up of a series of thresholds with steadily increasing rates. Between July 2020 – March 2021, however, due to the coronavirus crisis, the UK government introduced measures to increase the threshold for paying any basic stamp duty tax considerably to £500,000. Put simply, while you’ll still pay the 3% surcharge owed on any second property purchase, you’ll likely save considerably on overall stamp duty.

How much stamp duty will you pay?

Following the introduction of the stamp duty holiday in July 2020, stamp duty on any second property valued up to £500,000 is 3% of the property price (0% basic stamp duty + the 3% surcharge). For properties above this valuation, the difference is subject to increased charges that mirror the basic rate + 3%:

  • £500,001 – £925,000 comes with a stamp duty of 8%
  • £925,001 – £1.5m comes with a stamp duty of 13%
  • Anything above £1.5m comes with a stamp duty of 15%

So, if you’re purchasing a second property worth £800,000, for example, the stamp duty payable is £39,000 (3% on the first £500,000k is £15k + 8% on the next £300k is £24k). From April 2021, the stamp duty rates are due to revert back to June 2020 levels.

What is capital gains tax?

Capital gains tax is a charge that comes into effect when selling your second home if it has increased in value since you bought it. Capital gains tax is only applicable on the sale of any property that isn’t your main residence.

Within a tax year, you are entitled to a £12,300 (2020/21 rate) capital gains tax allowance. Like your personal tax allowance, any profits made up to your capital gains tax allowance aren’t taxable. Capital gains allowance resets at the beginning of each tax year.

Once your profits exceed your allowance, the rate of capital gains tax you owe depends on your tax bracket:

  • A basic-rate tax payer earns up to £50,000, and will pay 18% tax on second property profits after capital gains tax allowances.
  • A higher-rate tax payer earns over £50,000, and will pay 28% tax on second property profits after capital gains tax allowances.

If your earnings already take you into the higher tax bracket, then calculating your capital gains tax is straightforward – simply work out 28% of profits after your allowance and that will be your tax.

However, if your income falls into the basic tax bracket, but the profits from your sale – after allowances – take you up a band, then you’ll pay 18% on any profits until you hit £50,000 and 28% on anything else.

For example: Alex earns £40,000p/a, and sells his property for £30,000 profit. Minus his £12,300 capital gains allowance, he has made £17,700 profit that is taxable. The first £10,000 of this is taxed at 18% (£1,800) while the remaining £7,700 is taxed at 28% (£2,156). He will pay £3,956 capital gains tax.

Other costs you should consider

Buying a second house naturally comes with a series of continual costs for as long as you own the property, such as upkeep, repairs, and renovations. If you’re renting it out, you’ll also need to take income tax into consideration. This is taken out of your rental profits after allowable expenses, such as letting fees, maintenance costs, and utility bills.

Additionally, you’ll also have to pay council tax on your second property, the same as you do on your primary residence. However, did you know you might be able to get a discount on the council tax if you use your second property as a holiday home? It’s not an exact rate and each area is different, so it’s worthwhile contacting the council, but it’s not unheard of to get a 50% cut on your council bill.

There’s lots to think about when purchasing another home. Owning a second property comes with plenty of benefits, but there are also a series of obstacles you’ll have to navigate, so make sure you’re prepared for every eventuality. For more helpful tips and guides, head over to our blog.

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We are proud to be the most regulated property buyer operating in the ‘Quick House Sale’ industry. We are an active member of the NAPB (National Association Of Property Buyers) and are both RICS & NAEA (National Association of Estate Agents) regulated, which means you can have every confidence of selling your home with us quickly & easily.