About one million people in the UK own a second home, whether it be to invest, have a holiday home or to provide a home for a family member. If you’re aspiring to purchase a second home, you’ll need to be crystal-clear on the financial implications this will have.
While we definitely recommend you talk to a mortgage broker and/or a property investment manager to find out the right course of action for you, we’ve put together the guide below for buying a second home in Scotland to get you started. Without further ado, let’s jump right in.
Buying a holiday/secondary home
Many people dream of buying a holiday home in a place they visit often – and Scotland is chock-full of beautiful destinations for a home away from home for long weekends and summer holidays. Others buy a second home in the city to crash at during the week if they live in a rural area but travel for work.
In both instances, you’ll have to think long and hard about the affordability of this arrangement. Will you use the property enough to justify the purchase? Some people choose to let out this second property as a holiday home from time to time, but there are limitations to this with a residential mortgage – if you rent out your second home as a holiday let for a significant portion of the year, you’ll need a specialist holiday let mortgage.
Investing in buy-to-let property
Purchasing a buy-to-let property is a favoured investment option for those who want to put their money into a tangible asset that has historically been quite stable in comparison to stocks.
Your rental income will pay for your mortgage after which you’ll still have some passive income from it (especially if you choose an interest only mortgage) while your investment property grows in value over time.
Let-to-buy is another avenue of property investment that most people haven’t heard of. This could be if you want to move to a new property but keep your existing home as an investment and rent it out. Alternatively, for some people, this is an option if they’ve bought a new home but are struggling to sell their own home at that particular time.
In these situations, you’ll have to talk to your lender or broker to see if you need to remortgage the property you already own in order to rent it out. You may only need “consent to let” in this situation. However, most of the time, whether you buy a property to rent it out or want to find tenants for your current residence, you’ll have to get a buy-to-let mortgage to do this.
Helping a family member onto the property ladder
“Bank of mum and dad” has become a very common way for young people to get onto the property ladder as prices keep rising. There are many ways to do this, and buying a property for your child is just one of them – and it may not be the cheapest option.
This is because of the fees that come with purchasing a second home, such as LBTT (more on this in a second). It may be a better idea to lend your child the money for the deposit as well as things like conveyancing fees and LBTT and have them buy the property in their own name.
A family deposit mortgage is another option, allowing parents to release equity from their home while your child borrows the whole sum needed for the purchase and pays you back with interest.
How to finance your second home
Keep in mind that if you’re still paying off the mortgage on your primary residence, you’ll need a significant deposit in order to qualify for a mortgage for your second home. We’d say you need 25% minimum, making your LTV (loan-to-value) ratio 75%. If you already own your primary residence outright or can pay for your second home in cash, you’ll be in a better position.
This is in order to reduce the risk for your lender, as they’ll want to make sure you can afford your mortgage repayments for both properties. They’ll also expect to see a healthy income and credit score, plus a decent projected rental income for your second property if you’re planning on renting it out.
When it comes to getting together a deposit for your second home, remortgaging your primary home to release equity is one option. However, as we’ve discussed on our blog in the past, equity release is an expensive and risky route to go down. Working with a property investment expert, you’ll be able to determine if this is the right option for you or if there’s a better avenue for fundraising for your second home, such as bridging finance.
The cost of buying a second property
Apart from your mortgage, there are several other costs associated with buying a second residence you need to be aware of. First on the list is your LBTT (Land & Building Transaction Tax) – Scotland’s equivalent of the stamp duty.
For your primary residence, LBTT rates start at 2% for properties purchased at £145k and over. For additional residential properties, you’ll have to pay an extra 4% of the total purchase price of your second home if it costs more than £40,000 to buy. This additional tax is called the Additional Dwelling Supplement (ADS).
Additionally, you’ll have to pay capital gains tax when you sell your secondary property if it has increased in value, taxed at the rate of 10% on gains. And of course, you’ll have to take into account the ongoing costs of owning property, such as council tax, utilities and home insurance.
How Cox & Co can help
As we already mentioned, speaking with a property expert is hugely helpful when buying a second property of any kind.
At Cox & Co, we can help you with every aspect of the process. We’re experts in property investment in Edinburgh and across Scotland’s central belt, housing mortgage brokering services, financial advice, property sales and lettings management all under one roof.
To find out more about how we can help you discover the best course of action for your financial goals, get in touch with us today.