Buying a second home: What you need to know

The lure of a coastal holiday home or a crash pad in the city has led to more than one in 10 of us owning a second home. But there is a lot to consider before you buy. Here we look at everything from the costs, mortgage options, taxes and how to make money from buying a second home.

Angela Kerr Director, Editor

Why do you want a second home?

According to a 2019 report by the Resolution Foundation, the amount of wealth held in second properties has increased by 50% over the past 20 years. More than one in 10 adults now owns a second property.

There are many reasons why you might be considering buying a second home. You might want:

• to have a rural retreat for weekends, as well as a crash pad in the city for work
• to own a home in your favourite holiday destination
• to put your savings to better use by putting it into buying a second home which will hopefully grow in value
• to invest now in a home or asset for your children or elderly parents
• to become a property developer, and you’re buying a second home to do up and sell on

Thinking of buying a second home? Speak to our mortgage partners to review all of your financing options

It is important you know exactly what you want to get from buying a second home. You need to know what you will use the property for so you can find the right one. For example, a second home for your own use could be quite different to an investment property you plan to turn into a holiday let.

Buying a second home mortgage calculator

Once you know what you want from your second property the next consideration is what you can afford to buy. You may be in the position to buy cash or you might need a mortgage in order to buy your second home.

Use our mortgage calculator to find out how much you could borrow

If you are still repaying a mortgage on your main home don’t worry, you can get another mortgage for a second home.

In order to get a second mortgage you will usually need to have:

• A large deposit – Typically you will need to able to put down at least 25% of the value of the property
• A healthy income – You will need to prove to the lender that you can afford the repayments on both the mortgage on your main home and the second mortgage.
• Details of any rental income – If you plan to let out the second property you will need to provide potential mortgage lenders with details of the likely rental income
• A good credit score – Lenders will want to see you are a reliable borrower before they consider you for a second mortgage

Our guides on buy to let mortgages and holiday-let mortgages can help you make a successful mortgage application.

When comparing costs, remember to find out:

• arrangement fees
• valuation costs
• legal fees
• early repayment fees

How to buy a second property using equity

One way to raise the deposit for a second property is by using the equity you have built up in your own home. So rather than an additional mortgage, you would remortgage you current home.

You typically need a 25% deposit for a second property. With the average property price in the UK sitting at £216,092 in 2020, you would need to increase your mortgage by £54,023 to release the money for an average deposit.

The first thing to check is if you have that much equity in your home. You need to deduct the remaining amount left on your mortgage from the current value of your home to see what equity you have. For example, if your home is worth £500,000 and you have £150,000 left on your mortgage you have £350,000 of equity in your home.

If you have enough equity, then you could increase the mortgage on your main home in order to release money that you can then use to purchase a second home.

On a 25-year mortgage with a 2% interest rate, borrowing an extra 54k could increase your repayments by £229 a month.

If you are an older borrower, you might think about a retirement interest-only mortgage (RIO) to release some equity. These allow you to only pay the interest on your mortgage until you die or go into long-term care, after which time the house is sold and the loan is repaid.

What are the additional costs of buying a second home?

1. Stamp duty on second homes

When you buy a second home, your original property becomes known as your ‘primary residence’ or ‘principal primary residence’ for tax purposes. Your second home is an additional property or secondary residence.

You have to pay more stamp duty when you buy a second home than you pay when purchasing a primary residence. Stamp duty is payable on any property worth more than £40,000.

Stamp duty rates in England and Northern Ireland from September 23, 2022

There are different rates on additional homes in Wales and Scotland.  Find out more with our guide to stamp duty on second homes or use our stamp duty calculator.  

2. Capital gains tax on second homes

Your second home will also be liable for capital gains tax when you come to sell it. If it increases in value beyond your capital gains allowance – currently £12,000 per person – you will have to pay up to 18% (28% if you are a higher or additional rate taxpayer, this reduces to 24% from April 2024) of the increase to the taxman. You can find out more with our guide to capital gains tax when selling your home.

3. Council tax on second homes

Don’t forget about council tax too. There is second home council tax. Second homes are defined as furnished homes where no one lives or the owner has a main home elsewhere.  But you may be able to get a reduction if your home meets certain criteria. See our guide to council tax reductions for more information.

How do I let out my second home?

You have two options when it comes to letting out your second home:

• You could decide to rent it out to long-term tenants and make it a ‘buy-to-let’. This can be a great way of generating an income from the property but there is a lot to consider from tax to mortgage options. We’d recommend reading our guide to investing in property.
• The second option is to turn your second home into a holiday let. This option allows you to still enjoy your second home yourself but also generate an income from it when it would otherwise be sitting empty. Find out more with our guide to turning your home into a holiday let.

Find out how much income you could make from your second home with our rent calculator

Buying a holiday home

Buying a second home in an area that you love to visit can be wonderful. You have a base there to visit year after year and when you aren’t using your holiday home, you could let it out to other tourists.

If you choose to let out your holiday home a lot, you may need to get a specific holiday let mortgage.

How you choose to run your holiday let is up to you. You can opt to have a holiday cottage firm manage it on your behalf, but they will take a large cut of your profits – typically around 20%. Alternatively, you could manage the property yourself and set up your own online listing for it. This involves a bit more work but means you can keep more of the income.

When working out how much you could make from letting out your second home don’t forget about the substantial set-up costs. You will have to recoup the cost of stamp duty, legal fees, any renovation work and potentially furnishing the property before you start to make a profit.

Want advice on holiday let mortgages? Speak to our fee-free mortgage brokers. Start the process online or on the phone

What is ‘let-to-buy’?

It might be that you are having to buy a second home because you can’t sell your main home. ‘Let-to-buy’ is where you rent out your current home, usually temporarily, so that you can buy, and live, somewhere else. Find out more with our Let to Buy mortgage explained guide

Buying a second home and renting out the first

If you are planning to let out your current home and move into your second home you will need to talk to your mortgage lender. Some lenders do not allow you to rent out your home so you may have to remortgage onto a buy-to-let mortgage. Get help understanding your mortgage options and finding a buy-to-let mortgage

You will also need to speak to your home insurance provider to amend your policy to reflect the fact your home is being let.

Also, be aware that if you decide to sell your first home in the future, it may be liable for capital gains tax depending on how long you have been renting it out for.

I’m buying a second home to help a family member get on the property ladder

Buying a second home to help someone else buy their first home may not be the best way to help. If you are listed on the deeds then it will count as an additional property for stamp duty purposes and an extra 3% tax will be due. This could make the property significantly more expensive. Find out instead about several other ways to help a family member get on the property ladder.

Thinking of buying a a second home? Speak to our mortgage partners to find the best option for you. Start the process online or on the phone