Guide to Buying a Second Home

Whether you’re looking for a peaceful holiday retreat, aiming to invest and generate income through a buy-to-let property, or simply want to expand your property portfolio, there are many reasons why you might be considering purchasing a second home.

With that said, buying a second home does come with its own set of challenges and considerations. Unlike your first home, getting a second mortgage often involves stricter lending criteria, higher deposits, and additional tax responsibilities.

In this article, we take you through all the key differences, providing a complete guide to everything you need to know about purchasing a second home. Let’s jump in.

How is a Second Home Different from Your First?

Purchasing a second home will have some key differences compared to the purchase of your first home. Specifically, there will be changes to the financial, legal, and tax implications, as well as how lenders will view your mortgage application in general.

A Second Home Lender Assessment

Lenders will assess a mortgage application for a second home with a much stricter lending criteria. The extra financial strain of owning multiple properties will often be viewed as an increased risk factor compared to your first house property.

As such, it is important to note that you may face higher interest rates, larger deposits, and stricter affordability assessments. Understanding these distinctions is crucial to managing your expectations and financial planning.

Second Home Tax Implications

While Stamp Duty Tax will remain the most common and significant form of tax that you’ll have to pay, one of the key differences related to your second home tax obligations will be the added surcharge.

Most notably, you will have to pay an additional 3% surcharge on stamp duty on second homes. This surcharge applies on top of the standard stamp duty rates and increases the upfront costs associated with buying your second property.

In addition, when it comes to selling a second home and taxes, you should be aware that while your main residence is usually exempt from capital gains tax, profits made from selling a second home are typically subject to capital gains tax.

Understanding your tax obligations before making a property purchase is vital in planning for the future, as this can help you navigate all potential tax liabilities both during the purchase and sale of your second home property.

What Are the Differences Between Second Home, Holiday Home, and Buy-to-Let?

The type of property and the purpose behind your second home can have different implications for tax and mortgage options. As such, it’s important to understand the key difference between using a second home as a traditional second home, holiday home, or a buy-to-let property.

Second Home

A traditional second home property is a residence that you choose to keep and reside in at your own leisure and is in addition to your main residence. As such, this would typically be used for personal stays rather than regular rental. It might serve as a weekend getaway or a place to stay during holidays, but it does not serve as a main source of income or opportunity to generate income.

This type of property usually attracts additional taxes such as higher stamp duty rates, but avoids any rental income stipulations, as the property purpose is not to let.

Holiday Home

As the name suggests, this type of second home will often be located in popular tourist areas and used mainly for leisure. While some owners rent out holiday homes occasionally, this use can affect your mortgage options and tax responsibilities.

Depending on your future plans, lenders may offer mortgage products, such as a second mortgage holiday home product that has specific stipulations, but provides flexibility in understanding the seasonal nature of a holiday home.

Buy-to-Let Property

Buy-to-let properties are purchased primarily as an investment to generate rental income.

This comes with landlord responsibilities, including legal obligations and tax on rental earnings. It is important to note that securing a buy-to-let as a second mortgage will differ from the traditional standard second home mortgages. Lenders will want to ascertain affordability alongside projected rental income and potential void periods when assessing the application.

Knowing these differences can help place you on the right track to selecting the right type of  mortgage for your needs.

Is It a Good Idea to Buy a Second Home?

It’s no secret that buying a second home can offer a numerous amount of benefits, but it can also add complications and requires a thorough and thought-out plan for the future. As such. the answer to “whether it is a good idea to buy a second home” wholly depends on your own personal goals and financial standing.

Having a second home provides you with a personal getaway for holidays or weekends, enhancing your lifestyle and giving you flexibility. Additionally, second properties can serve as investment assets, either through capital appreciation or rental income, which can contribute to your overall wealth.

However, it is crucial to understand that purchasing a second home undoubtedly comes with increased financial responsibilities.

You will have to reliably manage two mortgage payments, any additional maintenance costs, and possibly higher insurance premiums. It is also important to consider the impact of additional taxes such as the second home tax surcharge on stamp duty and capital gains tax – as we’ve noted above – when you decide to sell.

If buying a second home is on your radar, then it’s best practice to carefully consider the following points:

• Your ability to comfortably manage two mortgage payments
• The additional taxes and fees associated with second homes
• Your long-term plans for the property, whether personal use or rental income
• The property market trends and potential for capital growth in the area

Ultimately, only you know the right answer. Deciding whether to buy a second home will depend on your financial health, investment goals, and the intended use of the property.

How Much Can I Borrow for a Second Property?

Perhaps one of the most important questions when considering purchasing a second property: “how much am I allowed to borrow for a second property?”

As we’ve previously noted, it’s important to understand that lenders will apply a more stringent criteria for second mortgages. This is due to the predicted risk of adding a second mortgage that will stretch your finances further.

With that said, your borrowing limit will still depend on the ‘usual suspects’, including factors such as your  income, credit history, current debts, and your chosen lender’s affordability assessments.

In addition, lenders will typically require a larger deposit for a second home, usually between 15% and 25% of the property value, and the type of property also affects borrowing capacity.

For example, if you’re purchasing a buy-to-let property, lenders will assess the projected rental income, which generally must cover between 125% and 145% of the mortgage repayments to ensure affordability.

Key factors influencing how much you can borrow include:

• Your annual income and employment stability
• Existing debt and monthly financial commitments
• The size of your mortgage deposit and the property’s purchase price
• Expected rental income if the property is intended as a buy-to-let investment
• Credit score and overall affordability as assessed by lenders

It is important to also consider that, as second homes are seen as higher risk, interest rates may also be slightly higher and the lending process more detailed. Working with a trusted mortgage broker – like Boon Brokers – can help provide clarity on your borrowing power and help secure you the most competitive deals with the most suitable lenders.

Step-by-Step Mortgage Application Process for a Second Home

Getting a mortgage for a second home can be more complex than the first time around. As such, we’ve created a quick step-by-step detailed process to give you an overview of what’s involved. Starting with:

1. Review Your Finances

Although this may sound obvious, before applying, it is important that you first assess your income, existing debts, and your current mortgage. Knowing that lenders will want to see that you can comfortably afford repayments on multiple properties is the key to having a mortgage for a second home approved.

2. Calculate Borrowing Capacity

Find out how much you can borrow. This depends on your income, credit history, and the lender’s criteria for second homes. While you can use online tools – such as a mortgage calculator – it is always best to seek professional advice from a trusted mortgage broker. This way, you will be able to understand exactly what your borrowing power will be across a wide-range of lenders.

3. Save for Your Deposit

Second homes will typically require larger deposits. Lenders will expect between 15% and 25% of the property’s value.

4. Gather Documentation

Prepare necessary documents such as proof of income, bank statements, ID, and details of your current mortgage. If you’re working with a trusted mortgage broker, like Boon Brokers, then your dedicated adviser can help you organise all the documentation you will need for your mortgage application.

5. Find Suitable Mortgage Deals

This step can be made simple by working with a trusted whole-of-market mortgage broker. However, it is important to compare mortgage products across a variety of lenders. A second mortgage will often have different interest rates and fees compared to a first mortgage, so it’s crucial that you find a competitive mortgage product that matches your needs.

6. Submit Your Application

Complete the application form and provide all supporting documents. At this time, your lender will carry out credit checks and affordability assessments.

7. Property Valuation

The lender will then arrange a valuation to confirm the property’s value and ensure it’s suitable security for the loan.

8. Receive Mortgage Offer

If approved, you’ll get a formal offer outlining the loan amount, interest rate, and terms.

9. Complete Legal Formalities

If you’ve not chosen to work with a mortgage broker who offers a convenience package, this is where you will have to consult and work with a solicitor to exchange contracts and carry out conveyancing.

10. Complete the Purchase

Finally, on completion day, funds will be transferred and you officially become the owner of your second home.

What Costs are Involved with Buying a Second Home?

Understanding the cost of buying a second home can help you budget accurately and avoid surprises. Aside from the property price, several additional costs apply:

• Conveyancing Costs

Conveyancing fees cover the legal work to transfer ownership. The average cost for a conveyancer is £1,500 plus VAT, but this will depend on your chosen solicitor or conveyancer.

• Insurance Costs

Insurance costs can be difficult to calculate until you know the specifics. For example, you will need home insurance (buildings cover) for your second property and as you may not be occupying the property for much of the year, this can be expensive.

In addition, there is also the option to take out life insurance and critical illness cover to protect the mortgage liability.

• Survey Costs

Before purchasing a property, you need to ensure that the property is well constructed and in good condition. As such, a property survey is essential to check for structural issues. The exact  cost of a survey can vary depending on the survey type – from a basic Home Buyer report to a full structural survey.

• Mortgage Application Fees

Most lenders charge an application fee – also known as a booking fee – to cover the administrative costs of arranging your mortgage.

In addition, a separate fee may be applied for the property valuation. While some lenders absorb the valuation cost as an incentive to encourage applications, others require you to pay it upfront. Application fees, on the other hand, are often added to the total loan amount, depending on the lender’s terms.

• Stamp Duty

Stamp Duty Land Tax (SDLT) on second properties is charged at the standard rate, plus an additional 3% surcharge. The rules around stamp duty on second homes can be complex and even extend beyond the UK.

For instance, if you already own a property abroad – such as in France – and then purchase your first property in the UK, the higher second home stamp duty rate will still apply.

• Mortgage Broker Fees

It is important to note that some mortgage brokers will charge fees for their advice. However, this cost can be avoided by working with a fee-free trusted whole-of-market mortgage broker.

At Boon Brokers, we provide fee-free expert advice with no charge to you. We charge the lenders our commission, making us dedicated to helping you find the best mortgage deals that match your needs – without the additional cost.

• Mortgage Deposit

As with a standard residential mortgage, you will still be required to put down a deposit. The deposit on a second house is usually much higher, and can range between 15% and 25% – depending on your chosen lender.

Buying a Holiday Home

Securing a second mortgage for a holiday home is a popular choice for those looking to spread their wings and enjoy personal holidays with the added financial advantage of potentially earning rental income.

So, how do you secure a mortgage for a holiday home?

If you plan to let the property and generate income, most lenders will require evidence of its rental potential. This may include projected occupancy rates or local demand for short-term lets.

It’s also important to note that interest rates for second mortgage holiday home products are typically higher than standard residential mortgages.

The tax rules can be equally complex. To qualify for certain tax reliefs, your holiday let must be available to rent for at least 210 days a year and actually let for a minimum of 105 days. If these thresholds aren’t met, you may lose access to those reliefs and face a higher tax liability.

Before purchasing a holiday home, it’s vital to assess the rental income potential, understand the associated tax obligations, and factor in the higher mortgage costs.

Purchasing a Buy-to-Let Second Property

Purchasing a second property to let is a common strategy for investors looking to generate long-term rental income and capital growth. Most notably, a buy-to-let second mortgage is specifically designed for this purpose and comes with its own set of criteria.

Lenders will carry out thorough financial checks, including an assessment of your projected rental income. Typically, the rental income must cover between 125% and 145% of the monthly mortgage repayments to meet affordability requirements.

Deposits for buy-to-let properties are also higher, with most lenders requiring a minimum of 25%. This reflects the increased level of risk associated with rental properties.

In addition to mortgage costs, landlords must consider responsibilities such as tenant management, ongoing maintenance, and compliance with evolving tax rules – including the phased removal of mortgage interest tax relief.

Given these complexities, working with a mortgage broker who specialises in buy-to-let finance can make a significant difference in securing the most suitable deal for your investment goals.

How Can a Mortgage Broker Help You Secure a Second Mortgage?

Understanding the process of getting a second mortgage and going through each step can sometimes feel very complicated.

But don’t worry – we’re here to help you.

At Boon Brokers, we specialise in providing fee-free, expert advice that is tailored to your unique financial circumstances and property goals.

Our experienced mortgage advisors guide you through every step with ease. From assessing your borrowing capacity and explaining costs to helping you access the most competitive mortgage products available. We’ll handle the paperwork and liaise with lenders to make the process as smooth and as stress-free as for you.

Contact Boon Brokers today and discuss your second property mortgage with an expert who cares.