William Cooper

Written by

William Cooper

5 minute read

Updated 14th February 2024

Tax Implications, Equity, & Insurance

If you’ve ever thought about owning a second home, you’re not alone. In fact, official figures show that more than one in 10 UK adults now owns a second property, including buy-to-lets and holiday homes. The appeal is obvious: not only is property a sound long-term investment, it could also provide extra income through renting or short-term lets. Plus, of course, ready holiday accommodation for you and your family.

But before you commit, be aware that purchasing a second home has different financial implications to buying your first or main property – as well as a few additional expenses you’ll need to factor into your calculations.  

In this guide, we’ll look at:

  • Mortgage options when buying a second home
  • Stamp duty on second homes
  • Tax implications of buying a second home
  • How equity works when buying a second home
  • Insuring a second home

Mortgage options when buying a second home

Firstly, consider how you’ll purchase your second home. Mortgage lenders usually charge higher rates on second properties, so it’s a good idea to line up an appointment with a mortgage advisor if you plan to go down that route. Affordability requirements if this will be your second mortgage, while you’ll be looked on more favourably if you’ve paid off the mortgage on your main home. A substantial deposit makes you an attractive prospect too: the greater the sum you can put down, the lower the interest rate you’re likely to secure. 

Buy-to-let mortgages

If you plan to rent out the property long term, you need to apply for a buy-to-let mortgage. A few things to note:

  • The deposit will likely be around 25% but could be as high as 40%
  • Most buy-to-let mortgages are interest only, meaning that you only pay for interest and will still have to repay the loan in full at the end of the mortgage term 
  • Interest rates are usually higher than a standard mortgage 
  • Lenders will need to be satisfied that the rent will more than cover the mortgage interest
  • The rules on tax relief have changed: as of April 2020, you can’t deduct any of your mortgage interest payment from your rental income before paying tax. Instead, your interest payment will qualify for a 20% tax credit
  • Buy-to-let mortgages are not regulated by the FCA

Buying and renting out a holiday home 

If you’re looking for a holiday home and have no plans to rent it out you should be able to apply for a normal mortgage.

  • The deposit will be around 15%
  • Lenders will need to be confident that you can afford your current mortgage payments as well as those on a second mortgage
  • Interest rates and fees may be slightly higher than on your first mortgage 
  • If you later decide to rent the property out you’ll need to apply for a ‘consent to let’ from your mortgage lender. This could mean paying a fee or switching to a higher interest rate

If you plan to rent your holiday home out, you’ll need a holiday-let mortgage:

  • The deposit will be around 25%
  • Lenders will need to be satisfied that the rental income will more than cover the mortgage interest, typically between 125% and 145% 
  • A furnished home that’s available to holidaymakers for at least 210 days per year is classed as a business, meaning you can deduct all your expenses (including the interest you pay on your mortgage) from your rental income before you’re assessed for tax
  • Some lenders won’t let you borrow on short-term lets like Airbnb as the high guest turnover is seen as a risk

Stamp duty on second homes

When buying a second home, you’ll pay a 3% stamp duty surcharge. The government’s stamp duty on second homes calculator will help you work out how much you might have to pay.

Stamp duty rates in England & Northern Ireland from October 2021

Up to £125,0000%3%
£125,001 to £250,0002%5%
£250,001 to £925,0005%8%
£925,001 to £1.5 million10%13%
Over £1.5 million12%15%

Tax implications of buying a second home

If you decide to sell your second home you’ll have to pay capital gains tax. The amount you pay will depend on your income tax bracket and how much profit you make on the property. If it increases in value beyond your capital gains allowance – currently £12,000 per person – you’ll have to pay up to 18% of the increase, or 28% if you are a higher- or additional-rate taxpayer.  

You may be able to offset expenses such as stamp duty, legal fees and estate agent fees when doing your calculations. You also get full relief on the years you lived in the home and the last nine months you owned the home, even if you weren’t living there at the time. You can use the government’s capital gains tax calculator to work out much tax you’d need to pay when you come to sell.

How equity works when buying a second home

One way to raise a deposit is by using equity – increasing the mortgage on your main home to release money that you can then use to purchase a second home. If you own your main home outright, your equity is the total value of your home. If you have a mortgage, your equity is your property’s value minus your remaining mortgage debt. The HomeOwners Alliance calculates that on a 25-year mortgage with a 2% interest rate, borrowing an extra £54,000 could increase your repayments by £229 a month.

If you’re over 55, you could consider equity release in the form of a lifetime mortgage, which allows you to access a tax-free cash lump sum from the equity in your home without selling it. There are no monthly payments – instead, interest on the money you borrow accumulates over time and the full amount is typically repaid when you die or go into long-term care or pass away, after which the house is sold and the loan is repaid.

Insuring a second home

Insurance works differently for a second home too. Your second home might be left unoccupied for long periods of time, or rented out to other people, meaning the risks are different to standard home insurance. 

Second home insurance for holiday homes 

If your second property is a holiday home, you’ll need an insurance policy that will cover it for any long periods when it’s left unoccupied. If you rent it out to others, again your policy must accommodate this or the insurance could be invalid.

Second home insurance for rental properties 

If your second property is rented out on an assured tenancy, you’ll need landlord insurance. This is tailored to the specific risks that come with renting to tenants, covering theft, fire and weather damage for the structure of the property and any contents owned by you, such as furniture. 

Home insurance for unoccupied second homes 

If your second home is unoccupied for long periods of time, it presents extra risks like theft, vandalism, water leaks and burst pipes, and fires. Standard policies – for home insurance, holiday homes or rented properties – have a maximum length of time the property can be left empty, which could be as little as 30 days. If you leave your second home empty for longer than this, you need unoccupied property insurance. 

Unoccupied home insurance covers all types of empty property that are left unoccupied for more than 30 days. As well as holiday homes or second homes visited on rare occasions, it’s also used when: 

  • You’re renovating your home and living elsewhere (see renovation insurance below)
  • You’re selling your home and there’s substantial gap between exchange and completion 
  • There’s in gap in tenancies at a let property
  • You’re inheriting the home and it is going through probate
  • You’re taking a long holiday and don’t have a house sitter

Renovation insurance

If you’re renovating or extending your second home, you may need a specialist works insurance policy to cover the existing home, building works and materials, as well your own liability. It’s important to note that your builder’s policy won’t cover your existing structure, or specific perils such as flood, storm or subsidence. Since building works can present extra risks to the structure of the building, renovation and extension insurance allows you to protect your investment against loss or damage. 

Hopefully we’ve been able to provide a helpful overview of the financial considerations involved with buying a second property. Insurance requirements can be complex, so don’t hesitate to get in touch. We’re always happy to talk you through your options and make sure you have the right level of cover in place.

Written by William Cooper

I started insurance broking in 2009. I followed my great-grandfather, grandfather, and father into the world of insurance. In 2019, I decided I wanted to do things differently. I formed Stanhope in 2019 with Matthew Ashton and Rachel Living. We want to shake up the industry! Let's make insurance cool and useful for our customers. Let's improve the customer journey and get them to trust us as their insurance company. Let's pay claims quickly; let's be excellent and honest in all that we do!

William Cooper

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