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Should I buy a second home as an investment?

Troy Stevens 07 July 2022

More than 1 in 10 adults in the UK now own a second property. But should you join them?

When it comes to long-term growth, intelligent property investment can really pay off. For the risk-takers out there, renovating a property in the space of a few months also offers the potential to make a tidy sum.

But should you buy a second home as an investment? We take a look at why you might – and whether it’s a good idea overall.

Why would you buy a second home?

Well, who wouldn’t want two houses?! In reality though, those buying a second home do so for a specific reason, such as:

To live in part-time

It’s just a dream for many of us, but some can afford to purchase a second home for their exclusive use. Examples of this would be a holiday home to use for recreation or property near a workplace to stay in during the working week before returning to another property at weekends.

To let out 

This is a common reason to have a second property in the UK. There are almost 3 million buy-to-let landlords here, a figure which has risen 50% since 2017. Buying a property to rent out means you can cover the mortgage using what the tenants pay you – and you should have a little extra each month as income. 

As a holiday let

Holiday lets involve renting to short-term tenants who have a main home elsewhere. Holiday let properties are subject to different rules and regulations to buy-to-lets – you’ll also need to apply for a different type of mortgage to purchase a property as a holiday let. Furnished holiday lets allow you to claim tax relief on mortgage interest – a benefit over traditional buy-to-lets.

To store savings

Instead of putting money into an ISA, stocks, shares or other forms of investment, keeping it in property is a relatively low-risk option. Even if the property doesn’t see a significant increase in value quickly, you can be assured that you’ll make capital growth despite fluctuations in the market.

To develop 

It isn’t for the inexperienced – but developing a property quickly in order to sell it for a profit (what they call ‘flipping’ in the USA) is one reason people buy a second property. This is riskier than the buy-to-let option – but get it right, and you could make tens of thousands in a relatively short time.

Should I buy a second home as an investment?

Buying a second home as an investment is always a good idea if you can afford the associated initial costs. This is because the UK property market isn’t volatile – meaning it doesn’t fluctuate wildly, and homes generally increase in value over time. The general trajectory of the market is upward; most homes are worth more now than they were ten years ago.

It’s worth noting that this doesn’t apply in every single case. Some houses lose value due to things like:

  • Physical problems – structural faults, e.g. subsidence, neglect, damage to the property
  • Social factors – closure of local amenities or transport links, a sudden increase in crime
  • Environmental factors – Japanese knotweed, a sewage works built nearby

How can I buy a second home?

If you’ve got a large lump sum, such as life savings or an inheritance, you’re in a position to be a cash buyer. 

Otherwise, you’ll be in the best position to buy a second home if you’ve paid off your existing mortgage. This is because mortgage lenders need assurance that you’ll be able to afford the repayments on your salary – and they don’t take it for granted that your property will always be tenanted, for example. 

Don’t worry if you’ve still got many years left on the mortgage – you may still be able to acquire a second home. However, you’ll likely need a larger deposit to secure a second home – at least 20%. This is because a second mortgage will put more pressure on your finances, so lenders need to know you’ll have some equity from the beginning should you no longer be able to pay the mortgage. A mortgage advisor will be able to help you review your options.

What do I need to consider when buying a second home?

Of course, research is key. Make sure your investment property is in an area which sees a good rental market – think city centres or places with good transport/commuter links. Look at statistics, too – a low number of long-term property vacancies and a high number of renters are good places to start.

You might want to consider making yours a House of Multiple Occupation (HMO), which means there are several adults living in the property who aren’t related or partners. This is easier to do in student areas or places with lots of young professionals and can see a rental income return of well over 7%. 

You may have heard that things aren’t as straightforward as they used to be for buy-to-let landlords in the UK. This is because the government have introduced new regulations which make it more expensive to be a landlord. This includes:

  • The surcharge on stamp duty for second homes, which adds an extra 3% onto the usual stamp duty amount on homes of any value. 
  • The previous perk of being able to claim tax relief on mortgage interest has changed, with only a flat 20% rate being available as tax relief (previously 40% for higher-rate taxpayers).

It’s also important to remember that if you make money from property, your tax status changes. You’ll need to fill out an annual Self-Assessment tax return and pay tax on both rental income and capital growth.

Further, you’ll have to ensure you have the right landlord insurance in place, which can help cover your costs if the property isn’t tenanted for periods.

All things considered, purchasing a home on the UK property market is generally considered a good, sound investment thanks to the potential to make steady rental income and reliable long-term capital growth.

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