Is it worth buying a second home?

Recent official figures suggest that the number of second homes in the UK has risen by a third in five years to nearly half a million properties. About one in ten Brits own a second property, most of which are buy-to-let investments and holiday lets. 

Of course, we are all aware of the continued upward trajectory of house prices over the last decades, which has produced steady returns for property investors and repeatedly defied market predictions. So, are property investments still a good idea?

Looking at current economic forecasts, it’s hard to predict how the markets will react to spiraling energy prices and the cost-of-living crisis, rising inflation, and the war in Ukraine. Then there’s the recent appointment of Liz Truss as the UK’s new Prime Minister, the continuing impact of Brexit, and a post-pandemic economy that is nowhere near back to normal.

Be that as it may, one thing is certain: The perfect timing of any property purchase is always easiest to see in hindsight. And, while there’s plenty of uncertainty around at the moment, the property market has always proven to be resilient, largely as a result of demand outstripping supply. The decision to invest in a second home will largely be determined by your individual situation and financial goals, so let’s look at some key questions you should be asking:

How can I finance my second home purchase?

Unless you have a large lump sum to invest, the traditional route to financing a property purchase is via a mortgage. There are strict lending requirements for second homes, and if you’re able to redeem the mortgage on your main residence first, you’ll be in a much better position to get the best rates. If you’re aged 55 years or over and have cash tied up in your home, you can also investigate equity release as a viable financing option.

Be aware that lenders typically require larger deposits of 15% or more for second homes, and possibly twice the amount for specialist buy-to-let and holiday let mortgages. Obviously, the higher the deposit you’re able to pay upfront, the more competitive the mortgage offer you’ll be able to attract.

It is also important to bear in mind that second home purchases are subject to a 3% surcharge on stamp duty (applicable to the whole purchase price) while any profit you make on the sale of the property will be subject to capital gains tax. Make sure you build this into your budget.

What is my main motivation for buying a second home?

Clearly, the choice of your second property will not only be determined by your financial position but also by the purpose of your goals as a new property investor.

Are you looking for a home away from home?

Are you looking for a weekend retreat in a beautiful location to recharge your batteries? Do you often work in another UK location and would prefer a homely environment rather than a hotel stay? A second property may tick all the boxes. Bear in mind that in order to produce a good return on your investment without the benefit of any rental income, you will be relying on long-term capital growth.

Would you love to own a second home for holidays?

Having a cottage on the coast or in the beautiful countryside is many people’s idea of bliss. Your second home will be there whenever you need a break from the stresses of everyday life, providing welcome holiday accommodation on demand. Many second homeowners eventually relocate or retire to their second property, taking advantage of the lifestyle improvements offered by the location.

Are you interested in becoming a holiday let landlord?

Owning a second property in a desirable location can give you the best of both worlds: It’s free UK holidays for you and your family and additional income when you’re not using the property. A furnished holiday let (FHL) is classed by HMRC as a business if it’s available for 210+ days per year, which means holiday let income is taxable, though certain allowances are available and tax reliefs can be claimed.

Would you like to invest in a buy-to-let property?

Buying a rental property for long-term tenancies (as opposed to short-term holiday lets) is a tried and tested investment strategy that can produce a reliable income stream and rental yields of 5% and more in addition to capital growth. Bristol, Oxford and Cambridge are topping the BTL charts in 2022. Research your target areas and choose your audience carefully – students, young professionals or families are popular target markets – and speak to a mortgage broker to get the best finance deal.

Whether you invest in short-term or long-term rental property, bear in mind that being a landlord is a hands-on job. If you’re dreading the prospect of dealing with tenants or spending time and money on building maintenance to keep the property in good condition, commercial property investments may not be the right solution for you.

Do you want to try your hand at property development?

Another option to invest in additional residential property is what’s called ‘property flipping’. Look for a competitively priced flat or house that is in need of renovation, carry out the necessary work to add capital value, then sell the property on at a healthy profit. As with any ‘doer-upper’ project, there’s an element of risk of things not going according to plan. From unforeseen building problems to delays in your redevelopment programme, or unexpected housing market changes, make sure you have a big enough buffer in the budget to be able to absorb extra costs and still make a profit.

Clarify your investment strategy

With the ongoing housing supply crisis in the UK showing no signs of abating, and financial market volatilities making stock market investments riskier, buying a second property may be a financially astute way to weather the economic storm. The decision, as always, is yours and should be based on your individual situation and the investment goals you are pursuing.

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