Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Investing can be a good way to help finance a second home
Buying a second home in the UK is a great option for people who want to get away for the weekend.
It can even earn you an eye-catching yield if you decide to let it out for part of the year.
Raising finance is not as straightforward as when you’re buying a first home, so there are lots of facts to consider before taking the plunge.
WHERE SHOULD I BUY A SECOND HOME?
Cornwall is by far the most popular place in which to buy a second home, but unfortunately prices have rocketed as a result.
‘That has not only meant the many second home buyers have been priced out of the Cornish market, but there has also been a backlash from the local community, because full-time residents are struggling to get onto the property ladder,’ says Sam Mitchell, chief executive of online estate agent HouseSimple.com.
As a result of a vote by residents of St Ives, which has seen a huge influx of second home buyers, new housing projects only get planning permission if reserved for full-time residents.
The average detached house price in a town like St Ives is well over £700,000. Cheaper options include places like North Wales and Northumberland.
HOW MUCH WILL A SECOND HOME COST?
The bulk of second homes in the UK are bought for between £250,000 and £600,000, according to property search consultant Garrington.
But the purchase price isn’t the only number to consider. Stamp duty is considerably higher on second homes, with each stamp duty ‘tier’ attracting an additional 3% tax. Taking a benchmark purchase price of £450,000, stamp duty would set you back £26,000.
Unless you’re able to buy the property outright, you’ll also need to save up for a deposit.
To boost your chances of securing a second home mortgage or holiday-let mortgage, you need a higher deposit than on a traditional mortgage. Experts recommend saving a deposit of 30%, equating to £135,000 on a £450,000 home.
Don’t forget you’ll also have to pay council tax on your second home. Tim Walford-Fitzgerald, private client partner at chartered accountant HW Fisher, warns that if you leave your property unfurnished and empty for more than two years, the council has the right to add a further 50% onto your council tax bill.
‘However, councils often still offer council tax discounts for second homes,’ he adds. ‘They define a second home as a furnished property that is not your main home. A discount of up to 50% may be available but it is up to each individual council how much discount they offer, if any.’
Overall, the cost of financing a £450,000 second home could amount to around £170,000.
HOW CAN I FINANCE A SECOND HOME?
One of the most popular methods of financing a second home is to remortgage your current property.
House prices have rocketed over the last decade, so it’s well worth getting your house valued to see how much equity you could release. You’ll need to prove to your lender that you can afford the higher repayments on your main home.
Let’s assume you’re able to remortage your house and release £100,000. For a second home costing £450,000, that leaves you with a more manageable bill of around £70,000 (£170,000 from our previous example minus £100,000).
INVESTING CAN YOU HELP YOU HIT THE GOAL
Planning in advance will definitely help here. If you save £500 a month you could build a pot worth £77,641 over 10 years, assuming investment growth of 5%. Investing in funds could be the best route as they provide instant diversification.
Ryan Hughes, head of active portfolios at AJ Bell, says this long-term approach means you can take on a reasonable level of risk.
‘The starting point should be a low cost core to the portfolio that gives good global coverage,’ says Hughes.
He recommends having a 30% portfolio weighting in Fidelity Index World (GB00BJS8SJ34), which provides an instant globally diversified portfolio.
‘Alongside this global core, a number of high quality equity holdings can be used to add value over time,’ says Hughes.
He reckons that for a UK investor, a 20% weighting in a UK equity fund such as Man GLG Undervalued Assets (GB00BFH3NC99) would be appropriate. The fund invests in companies that are unloved but well-managed and cash generative.
Hughes also suggests having a 20% weighting in Fidelity Strategic Bond (GB00BCRWZS59) and 10% each in Invesco Perpetual Asian (GB00BJ04DS38), Baillie Gifford High Yield Bond (GB00B1W0GF10) and Crux European Special Situations (GB00BTJRQ064).
As you approach the end of your investment period, it’s important to de-risk your portfolio. Otherwise, a sudden drop in the market could see your deposit value plummeting with not enough time to recoup losses.
CAN I EARN AN INCOME FROM MY SECOND HOME?
It’s possible to earn an income from your second home by renting it out as a holiday home.
It’s tougher to get approved for a holiday-let mortgage than a standard mortgage and the rates are also higher.
However Jonathan Hopper, managing director of property finder Garrington, says the rates are less than 5% on average – far less than the typical yield you could expect to get from letting out the property.
‘People who let their holiday home for anything north of 35 weeks of the year see yields of at least 8%. Others let it for 16 to 20 weeks of the year simply to cover their outgoings,’ he says.
A big perk of holiday-let mortgages is you can offset all expenses, including full mortgage interest, against the rental income. To qualify, the property needs to be available to let for less than two thirds of the year, and to have actually been rented for around one third of the year. (EP)