In recent years, people have seen second homes as a good investment. But with the rise in interest rates, and the increasing cost of mortgages, is the idea of a holiday home still appealing?

There are costs and complications to owning a second-home, which weigh in the balance of the decision.

Costs of a second home

Let’s have a look at the costs to start with. By ‘costs’ we mean anything that’s not part of the purchase price.

You’ll have all the usual costs of buying a home, such as the mortgage arrangement fees, valuation fees, and conveyancing fees. But there are additional costs to consider with a second home.

The first is stamp duty. Higher rates of stamp duty are payable on additional properties. 

Here are the thresholds (as at 24 November 2023):
Purchase price of the property Stamp duty rate
(only home) Stamp duty rate for additional properties
Up to £250,000 0% 3%
£250,001 to £925,000 5% 8%
£925,001 to £1.5 million 10% 13%
Over £1.5 million 12% 15%

The other costs to think about are:
•  Management fees: if you need an estate agent to manage the property for you
•  Cleaning costs: if you’re renting it out for short-term lets via sites like Air BnB
•  Listing costs: to advertise and market the property
•  Insurance: buildings and contents insurance
•  Service charge and ground rent: if it’s a leasehold property.

Mortgage considerations

Getting a mortgage for a second home isn’t quite the same as getting a mortgage for your main residence.

First of all, you’ll need a chunkier deposit. Typically, lenders will want to see 25% of the value of the home. That’s significantly more than they usual 10% for your main home.

The good news is that you have the option to remortgage your current home and use the equity towards the second home, so you don’t necessarily need the full deposit in cash.

As mortgage rates are on the rise across the board, you’ll need to consider the cost of a second mortgage. The mortgage rates and interest rates are usually even higher on a second home.

In order to be approved for a second mortgage, you’ll need to show that your income will cover the repayments on main home and second home. If you’re planning to rent it out, you’ll have to provide evidence of the likely rental income.

Holiday lets

With the popularity of sites like Air BnB, letting out your holiday home has become more straightforward.

What’s less straightforward is the ongoing cost in tax and mortgage payments.
First, you’ll need a specific holiday let mortgage. The terms of that mortgage will restrict the length of time that you can rent out the property at one time. If you want to rent it out for longer, you’ll need a commercial mortgage or another residential mortgage.

Then there’s the tax implications. If you earn over £85,000 per year from your holiday let, then you’ll need to register for VAT. You must let your property for at least 105 days in the year in order to qualify for a council tax exemption. But you will have to pay business rates instead.

The tax rules are fairly complicated and full details can be found on the Government’s website.

Each local authority has discretion to grant discounts on council tax for second homes, but in reality few do. In fact, in parts of Wales, second homes can incur a council tax premium of up to 300%.

The upside is that there is some tax relief available, such as Business Asset Disposal Relief. This sort of relief reduces your capital gains tax liability when you come to sell the property.

Tax on second homes

Second homes that aren’t furnished holiday lets still attract tax. Council tax will be payable, and when you come to sell the property, you’ll pay capital gains tax for any increase in value.

The conveyancing process

When it comes to the legal process, it’s the same as buying your existing property.
The only difference is that you are likely to have a little more flexibility on your completion date, because you’re not selling your own property at the same time.
But, given the nature of second homes, we often see a few more restrictions or warning signs when we conduct the searches. For examples, houses near the coast may be more at risk of flooding, which can affect the insurance available. Or houses in rural areas may be subject to planning limitations for extensions and alterations.
The other thing to bear in mind is that apartments are likely to be leasehold, which carries with it possible service charges and ground rent. For more information, please see our recent blog on the legal issues to consider when buying a leasehold property.

How we can help

If you’re thinking about buying a second home, we can help you navigate the risks and opportunities and make the process as smooth as possible for you. Please get in touch for an initial chat.