A second home is classified as any property that you own in addition to your main place of residence. This could include:
Buying a second home using a mortgage
If you are in a position to purchase a second home or holiday home outright, you won’t need to apply for a mortgage. However, buying a second property is not just for the very well-off, and there a various options for getting a second home mortgage whether you are buying to let or buying a holiday home. If you need a mortgage to buy a second home, there are two ways to do this.
If you have sufficient equity in your first property - you may be able to remortgage this property remortgage and use this cash to buy a second property. For example, if your first property is worth £500,000 and your outstanding mortgage is £100,000, you'll have £400,000 equity in your home. You could then remortgage increasing your borrowing to £300,000. This would raise £200,000 which you could use to buy a second property.
If you don't have sufficient equity in your first property – you will need a mortgage for the second property. The type of mortgage you need will depend on what you plan to use the property for. For example, if you plan to rent it out you will need a buy-to-let mortgage and the amount you can borrow will be based on the potential rental income.
To get a second home mortgage, you will have to show the mortgage provider that you have enough income to pay for this mortgage as well as the one you already have.
Second home mortgages and other costs
As well as the mortgage repayments, you will also need to consider the various taxes and other costs that you might have to pay if you own a second home. These could include:
– this has to be paid on most properties, but reductions of up to 50% may be available on second homes, at the discretion of the local council. If you rent out your second home, you may be able to transfer council tax responsibility to the tenant, or use the rent to you receive to help you cover council tax costs.
- If you rent out your second home the rental income needs to be declared on your tax return. This income is added to any other income you have and subject to income tax - the exact amount you pay will depend on your tax bracket.
Capital Gains Tax
- There are also tax implications when you sell a second property.
Capital Gains Tax on second homes
Capital Gains Tax is a tax on the profit when you sell or give away something (an ‘asset’) that has increased in value. You are taxed on the gain you make, rather than on the amount received. You don’t usually have to pay capital gains tax when you sell a property if it is your main (or only) residence and if you’ve only used it as a residence, rather than, say, letting it out as a business. However, if you have a second home which you then sell, any profits you make from the sale will be subject to capital gains tax.