If you’re lucky enough to be able to afford to buy a second property there are lots of things to bear in mind. In this guide we’ll cover holiday homes as well as buy-to-let.
If you’re buying an investment property and plan to rent it out, you will need to apply for a buy-to-let mortgage.
Buy-to-let lenders typically require a minimum deposit of between 25% and 40% to access the best deals.
They will also want to know how well equipped you are to manage the property.
Normally, the rent you receive needs to exceed your monthly mortgage payments by 25%. The lender will want to make sure you have sufficient insurance in place such as landlord’s insurance, which can cover you for void periods and repairs to your property.
It goes without saying that location, location, location still matters.
But remember that professional landlords hunt yield. That means they don’t always buy in the best area, they often grab properties that have a lower purchase price compared with the rent they can charge. That way they get a better return on their investment. Location still matters to renters, and you may one day hope to sell the property so up-and-coming areas could net you a tidy profit.
If you’re taking on a second mortgage for a holiday home, you will still need to provide your mortgage lender with evidence that you can afford two mortgages at the same time.
You may find the easiest way to raise the deposit is to release some equity in your existing home by remortgaging that at the same time.
Stamp Duty is often an afterthought but it represents a significant sum that can play havoc with your budget if you forget to factor it in early.
For second homes, the government levies an additional 3% charge on top of the standard rate of Stamp Duty Land Tax (SDLT) which works out as follows:
Second Home Surcharge
- 3% on the first £125,000
- 5% on the portion between £125,000 to £250,000
- 8% on the portion between £250,000 to £925,000
- 13% on the portion between £925,000 to £1.5 million
- 15% on anything over £1.5 million
The additional charge was introduced in 2016 by then-Chancellor George Osborne. Chancellor Philip Hammond has since faced calls to reverse the decision but, for now, you will still need to include it in your plans.
You will have to self-assess
You may never have had to fill out a tax return before.
But you will have to if you buy a second property as a buy-to-let investment.
The rental income you receive from your buy-to-let property is taxable. There are certain reliefs that will help reduce your tax bill so it’s worth looking into these. They include the cost of upkeep and letting agent fees.
You also get income tax relief on the mortgage interest you pay but this is changing as we’ll see below.
Loss of mortgage interest tax relief (and its replacement)
One of the recent big changes for those buying rental properties is the scrapping of the old system of mortgage interest tax relief and its replacement with a new 20% flat rate mortgage interest relief.
Under the old system, buy-to-let landlords were able to offset the interest they paid on their mortgage against their rental income to lower their tax bill.
While buy-to-let landlords could offset other expenses against rental income as well, such as letting agent fees and general maintenance, mortgage interest was one of the biggest tax reliefs on offer.
But in 2016 it was announced that tax relief on mortgage interest payments for buy-to-let landlords was being phased out from the 2017/18 tax year over a four-year period.
Tax year Percentage of finance costs deductible from rental income Percentage of basic rate tax reduction
| 2017 to 2018 | 75% | 25%
| 2018 to 2019 | 50% | 50%
| 2019 to 2020 | 25% | 75%
| 2020 to 2021 | 0% | 100%
However, a new flat rate relief is being introduced instead. Buy-to-let landlords will be able to deduct 20% of the interest they have paid from their tax bill.
We’ve produced a handy table for you at the bottom of this guide if you want to see these tax changes in action.
The government recently changed the law to allow councils to vary the amount of Council Tax they charge for some empty properties. This was to encourage people to bring empty homes back into use as quickly as possible.
Leave your property unfurnished and empty for more than two years and the Council has the right to add a further 50% onto your Council Tax bill.
However, councils still offer Council Tax discounts for second homes. 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. So this is something you should consider when picking a location.
Mortgage Interest Tax Relief Changes Example
LEt's say you earn £40,000 salary and receive £12,000 rental income from your buy-to-let property giving you a total income of £52,000. You pay £6,000 in mortgage interest each year.
Under the old system you would have been able to offset the £6,000 mortgage interest against your total income meaning you would have an income for tax purposes of £46,000.
Under the new system this year (2017/18) you would lose 25%, or £1,500 of your mortgage interest rate relief. But you then receive 20% basic tax relief on that 25% or £1,500 - £300. That leaves you paying tax on the remaining £1,200 and takes your total income for tax purposes up to £47,200.
Mortgage Interest Rate Relief tapering
| | 2016/17 | 2017/18 | 2018/19 | 2019/20 | 2020/21
| Mortgage Interest Rate Relief tapering | 100% | 75% | 50% | 25% | 0%
| Salary | £40,000 | £40,000 | £40,000 | £40,000 | £40,000
| Rental income | 12,000 | 12,000 | 12,000 | 12,000 | 12,000
| Total income | 52,000 | 52,000 | 52,000 | 52,000 | 52,000
| Mortgage interest paid | £6,000 | £6,000 | £6,000 | £6,000 | £6,000
| Deductible Mortgage Interest | (£6,000) | (£4,500) | (£3,000) | (£1,500) | £0
| Basic rate tax relief (20%) | £0 | £300 | £600 | £900 | £1,200
| Increase in tax | £0 | £1,200 | £2,400 | £3,600 | £4,800
| Total taxable income | £46,000 | £47,200 | £48,400 | £49,600 | £50,800
By 2020/21 you would have lost 100% of the old mortgage interest rate relief. But you do receive the new 20% basic tax relief on the mortgage interest you pay. In other words, 20% relief on £6,000 = £1,200. This would take your total income for tax purposes up to £50,800.
Most landlords who are basic rate taxpayers won’t see much change although there is a danger they will get dragged into the higher rate tax band. If that happens, any earnings above the threshold will be subject to higher rate tax at 40%, not basic rate (20%).
This may be mitigated if the government raises the higher rate personal tax allowance to £50,000, as it expected to do around 2020/21. But it’s worth bearing in mind that if the personal tax allowance doesn’t move higher as quickly as hoped, you could be paying more.