There are many reasons for people wanting to purchase a second home. They might want to buy an additional property as a holiday home in their favourite place on the coast, or a bolt hole in the city. The second home could be bought with the intention of providing a home for a family member, or as a holiday let. Or perhaps it is a long term investment for the future.
We have put together the following guide, which explains what a second home involves, and how different is it to a normal house purchase.
Can I buy a second home using equity?
Yes, buying a second property is possible using the equity you have in your main home. You will need a 25% deposit for a mortgage on a second home, so a mortgage lender will judge if you have enough equity to afford the second home mortgage repayments. You can calculate the equity you have by subtracting the capital you have left to pay on the mortgage of your main or primary residence from the current market value of the property.
Does the deposit increase on a second home?
Yes. Second home mortgages require applicants to put down a deposit of at least 25%. A normal mortgage would usually only need a deposit of 5-10%. You could use the equity on your main home to take out a remortgage and use those funds for a deposit on buying your second property.
What kind of mortgage do I need?
You will need to apply for a second home mortgage. Second home mortgages carry more stringent financial checks and criteria, because lenders need to be confident that you can keep up the mortgage payments on two properties. You may also need a specialist mortgage, such as one of the following:
- Buy to Let mortgage – if you are intending to rent the property out
- Holiday Let mortgage – if you are planning to let the property on a short-term basis to holiday-makers
Is it more difficult to get a mortgage on a second home?
It is harder to be accepted for a mortgage on a second home, simply because a lender will be conscious that applicants will already have significant financial commitments from their existing mortgage for their primary residence. A larger deposit of 25% is not the only requirement mortgage lenders will have. They will also need proof that you have an income substantial enough to enable you to afford mortgage repayments on two properties. They will also take into account your age and how long you can maintain your existing level of income.
How does buying a second home impact tax?
Buying a second property will have tax implications. You will pay a higher level of stamp duty than on your main residence, and won’t benefit from the 0% rate on properties up to £250,000. See the table below for the current rates (as of August 2023) of stamp duty on additional properties:
England and Northern Ireland Stamp Duty Rates for Second Properties:
Up to £250,000 3%
£250,001 - £925,000 8%
£925,001 - £1.5m 13%
Above £1.5m 15%
The amount of capital gains tax will also be affected. Basic rate taxpayers will pay 18% on the increase in value if they sell a property that is not their main residence. The only way to avoid paying capital gains tax on a second home is if the increase in value of the property is less than the individual capital gains allowance (currently £12,000).
You will also be liable for council tax on the second home, unless you qualify for an exemption or discount. You can find out more about council tax exemptions from your local council.
What are the additional costs involved?
Buying a second property will mean that you will have to pay for all the standard costs associated with purchasing a home, such as mortgage arrangement fees, mortgage valuation fees, conveyancing costs and buildings insurance.
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FAQs
Of course, when buying a second home, you can't ignore the associated expenses, including ongoing maintenance and upkeep and property taxes. These types of expenses can strain your budget or limit your financial ability to travel elsewhere.
What is the rule of thumb for buying a second home? ›
A good rule of thumb to consider? Consider budgeting about 1% of the home's purchase price for annual maintenance. So if you bought a $300,000 home, set aside $3,000 a year for such common pop-up costs as an emergency plumbing repair or a new furnace.
Is it easier to get approved for a second home? ›
Lenders typically require higher credit scores for second home mortgages compared to primary residence loans. Check your credit score and take steps to improve it if necessary, such as paying down debt, disputing errors on your credit report, and making all payments on time.
Is buying a second house a good idea? ›
A secondary property can be a great investment in your future. It can also help you earn additional income and provide a getaway from everyday life. If you've been thinking about purchasing a second home, here are some key considerations and tips for getting started.
Will buying a second home reduce my taxes? ›
Are Second-Home Expenses Tax Deductible? Yes, but it depends on how you use the home. If the home counts as a personal residence, you can generally deduct your mortgage interest on loans up to $750,000, as well as up to $10,000 in state and local taxes (SALT).
What does the IRS consider a second home? ›
For the IRS to consider a second home a personal residence for the tax year, you need to use the home for more than 14 days or 10% of the days that you rent it out, whichever is greater. So if you rented the house for 40 weeks (280 days), you would need to use the home for more than 28 days.
How much do you have to put down on your 2nd house? ›
On a second home, however, you will likely need to put down at least 10%. Because a second mortgage generally adds more financial pressure for a homebuyer, lenders typically look for a slightly higher credit score on a second mortgage.
What credit score do you need for a second home? ›
You'll typically have to meet higher credit score standards of at least 725 or even 750 to qualify for a conventional loan on a second home, depending on the lender. Your monthly debt-to-income ratio should be strong, particularly if you attempt to limit your down payment to 20%.
What is the 2 2 2 rule for mortgage? ›
One Spouse's Income Doesn't Meet Requirements
Many lenders use the 2/2/2 rule to evaluate loan eligibility, which typically requires: 2 years of W-2s. 2 years of tax returns. 2 months of bank statements.
How do snowbirds afford two homes? ›
If you're someone who would be reliant on rental income to afford your second home, you may want to opt for a series of seasonal rentals you return to year after year.
A key financial metric to assess is your debt-to-income (DTI) ratio. To comfortably afford a second property, your DTI should ideally not exceed 45%. While this threshold is a general benchmark, having a favorable credit score, a substantial down payment or considerable cash reserves can provide added flexibility.
How do you know if you can afford a second home? ›
How do I know if I can afford a second home? To determine if you can afford a second home, consider factors such as your income, existing debt, credit score, down payment amount, and ongoing expenses. Consulting with Mares Mortgage can help assess your financial situation and determine your affordability.
Can I use my equity to buy another house? ›
You can use home equity to buy another house if you have enough of an ownership stake in your residence and meet other eligibility requirements. The most common ways to tap your equity are via a home equity loan or home equity line of credit (HELOC).
What is the downside to a second mortgage? ›
Higher Interest Rates
Second mortgages usually have higher interest rates than first mortgages. This is because lenders see them as riskier. The higher the risk, the higher the rate. These increased rates mean higher monthly payments for borrowers.
How long should I wait to buy a second house? ›
Typically, there is no specific waiting period required. However, you should consider factors like your ability to qualify for a mortgage, manage multiple properties, and meet lender guidelines for multiple property ownership.
Do people regret buying a second home? ›
Gregg has some advice that a potential buyer might not want to hear: “Having been in the business for almost 40 years, one of the most interesting things I have found is that most people who buy a second home regret the decision after four or five years.
Are second mortgages a bad idea? ›
Second mortgages are often riskier because the primary mortgage has priority and is paid first in the event of default. The difference between the home's current market value and any remaining mortgage payments is called home equity.
Can a married couple have two primary residences? ›
For example, a married couple could acquire two primary residences if each spouse buys a primary residence and keeps their mortgages separate. This would mean each spouse having sufficient income on their own to buy a home. Additionally, conventional loans can create a second primary residence in some situations.
What is the purpose of a second home? ›
This property can be a vacation home or a residence that you can use for work. Essentially, a second home is defined as a place where you would only live for part of the year. The IRS defines a second home as a place that you visit for at least 14 days during the tax year.
