Buying a Second Property to Rent Out [Comprehensive Guide]

Buying a second property to rent out is a dream for many. Before you embark on purchasing another property and possibly taking on two mortgages, it’s good to weigh up the pros and cons and fully understand what you are getting into as a buy-to-let landlord.

For the right individual, two homes may be a great plan. Having a second property to rent out can be a great source of extra income. But being a landlord comes with plenty of costs and responsibilities you need to be aware of.

Let’s take a look at some of the things you need to know about ​​buying a second property and becoming a buy-to-let landlord.

Why Purchase a Second Property?

Buy-to-let is one of the UK’s most common investment strategies. Receiving rental income in the short-term as well as achieving capital growth over the long-term as property prices increase is a dream for many.

Whether you have a mortgaged home but have saved up some money and are considering a buy-to-let property, or want to buy a second home outright and get a return on the property down the line, it’s certainly worth considering buy-to-let.

Buy-to-let is a great opportunity to earn rental income while keeping the second home mortgage paid. It can even provide some surplus income, depending on the rent you can charge.

Another great benefit of buy-to-let is the potential for capital growth over time. Property prices often increase over time, so if you buy a property in an area with good growth potential, you could benefit from a significant return on your investment down the line.

Why do People Purchase a Second Home to Rent Out?

While some people are buying a second property to have a weekend retreat in their favourite holiday destination or a place in the city for work, many people purchase a second property to put their savings to better use by renting it out while it grows in value.

For the right person, two homes might be a great plan. Some homeowners like the idea of buying a second property to fix up and sell for profit, others plan to rent it out. It is important to know what you want to get out of owning a second home. If your focus is on buy-to-let, it’s important to find the right one – an investment property you plan on renting out will look very different from a holiday home or even a home you would purchase to live in. Read more about finding the right property in the UK- here.

When looking for a property to rent out, it is important to look at the potential income. This will help you determine if the property is a viable investment.

Can you Get a Second Property Morgage?

Yes, you can get a mortgage for a second property, but the process and requirements may differ from obtaining your first mortgage. 

Lenders typically have stricter criteria for financing second properties, whether you’re buying a holiday home, an investment property to rent out, or a property for a family member.

To get a mortgage on second home, lenders usually look for a few things:

Healthy Income

You will need to show to the lender that you can afford the mortgage repayments on both your homes, so your main home and the second mortgage.

Down Payment

In addition to a healthy income, you’ll usually need to provide a down payment for your second home. The amount of this down payment varies from lender to lender and also may depend on the type of property you are buying.

Credit Score

Lenders usually want to know that they are lending money to a reliable borrower before they approve any mortgage. Having a good credit score can help you to get a second mortgage. 

Income Details

When buying a second property, you’ll usually have to provide mortgage lenders with details of projected rental income and show how you came to this number. 

Purpose of the Second Property

If the second property is intended for rental purposes, you may need a buy-to-let mortgage. Lenders will consider the potential rental income from the property as part of the affordability assessment.

If you’re buying a property for personal use, such as a holiday home, lenders will assess your ability to afford two mortgages simultaneously.

Affordability and Eligibility

Lenders will thoroughly assess your financial situation to ensure you can afford the additional mortgage payments. This includes evaluating your income, existing mortgage payments, debts, and credit history.

For a buy-to-let mortgage, lenders typically require a larger deposit than for a primary residence, often around 25% or more of the property’s value.

Can you Afford Two Mortgages?

If you have finished paying off your first home, taking out another mortgage may be more affordable. However, it’s important to understand that homeownership is expensive and a lot of homeowners vastly underestimate the costs of homeownership. 

In addition to the mortgage, there are maintenance costs, furnishing the second home and some of the tax benefits that apply to a first home may not be available to a second home.

It’s important to consider all of these costs before taking out a second mortgage. You should also look at your existing debt and consider if you are able to take on more debt before making a decision.

You should also be aware that having two mortgages could affect your credit score. If you have multiple mortgages, lenders may assume that you are taking on too much debt and may view this as a risk when considering future credit applications. Therefore, it’s important to ensure you can afford both mortgages’ payments before taking out a second one.

How Much Deposit Do You Need for a Second Property?

Typically, for a second property mortgage you will need to put down a deposit of at least 25% of the value of the property. 

However, there are exceptions. 

For example, if you are looking to upsize to a bigger house and want to keep your existing property, you may have enough equity in the house to cover the 25% needed to make it a buy-to-let property.

This often means you may be able to purchase your second home for a 10% deposit if you are buying a second property to live in, because it is to become the main residence (the stamp duty will still apply). By converting your first residence into a buy-to-let property you can often buy the second residence with minimal deposit.

If you have an existing mortgage, you will have to meet strict affordability requirements to take out a loan on your second home. You should speak to a mortgage broker who will be able to advise you. They will be able to assess your finances and eligibility for a second property mortgage and advise you on the best options for you.

The amount of deposit required for purchasing a second property in the UK can vary significantly based on several factors, including the purpose of the property (e.g., personal use, buy-to-let), the lender’s criteria, and the buyer’s financial situation. Here’s a general overview:

For Buy-to-Let Properties

• Typical Deposit Requirements: For a buy-to-let property, lenders typically require a larger deposit compared to purchasing a primary residence. The deposit amount usually ranges from 20% to 40% of the property’s purchase price, with 25% being a common requirement.
• Reason for Higher Deposits: The higher deposit requirement reflects the perceived higher risk associated with rental properties. Lenders assume that there may be periods without rental income (void periods) and potential for damage to the property, which could affect the owner’s ability to cover the mortgage.

For Second Homes or Holiday Homes

• Typical Deposit Requirements: If the second property is intended for personal use, such as a holiday home or a second home for work purposes, lenders generally require a deposit of 15% to 25% of the property’s value. However, this can vary widely depending on the lender and your financial circumstances.
• Impact of Financial Situation: Your income, credit history, existing mortgage commitments, and overall financial health will influence the lender’s assessment of your application and the deposit required.

Factors Influencing Deposit Size

• Lender’s Criteria: Different lenders have varying requirements for second property mortgages, influenced by their risk appetite and the competitive landscape.
• Loan to Value (LTV) Ratio: The deposit required is inversely related to the Loan to Value (LTV) ratio you’re seeking. A lower LTV usually results in better interest rates but requires a higher deposit.
• Affordability Assessments: Lenders will conduct affordability assessments, considering your existing mortgage and other financial commitments. A stronger financial position might reduce the deposit requirement.
• Interest Rates: The interest rate offered on the mortgage can also influence the deposit size. In some cases, lenders might offer lower rates for higher deposits.

“Self Funding” a Second Property to Buy

If the rent in your second property is high enough to cover the rented property mortgage, it is known as “self-funding”. The usual deposit and income requirements apply, but if the rent is 125% or more of the mortgage repayments, it shouldn’t affect your affordability checks for the new place. 

Paying two mortgages can add financial pressure, so be sure to have a back-up plan if the rent stops coming in (due to a vacant property or bad tenants).

You may want to consider taking out a buy-to-let insurance policy in case of any unexpected costs. This will also help you to stay on top of any property repairs and maintenance.

In addition, it’s important to be mindful of the tax implications when self-funding a second property. If you’re not careful, you could end up with an unexpected tax bill at the end of the year. Make sure you speak to an accountant or financial advisor who can provide advice on how to structure your finances in a way that minimises your tax liability.

Make sure you do your research and weigh up all of your options before committing yourself financially.

What are the Advantages of Owning a Second Home? 

Income Potential

The short-term rental income on a second home may allow you to subsidise your home’s monthly mortgage repayments or pay for maintenance such as upgrades and repairs. 

Long Term Profits

The value of property across Great Britain has risen 53% over the last decade – from an average price of £222,989 to £341,019 today. When buying a second property you stand to gain from the capital gains that come from property price increase. Typically, property is thought to be a “safe” investment due to homes appreciating in value in the long run.

A Way to Diversify Your Investments.

Investing in property is a good way to spread your investments to minimise exposure. The housing market tends to show an increase in value overtime, but be sure to research the local economy and market where you plan to make your purchase.

​​What are the Pitfalls of Owning a Second Home?

When buying a second property, there are plenty of advantages, but there are some aspects to be aware of too. Owning a second home comes with costs and you’ll need to account for recurring and one-off expenses on your property. Be sure to take into account the following:

• Renovations, upgrades and decorations 
• The cost of home devices and appliances
• Maintenance costs for the property and land such as garden
• Bills including water, electricity and gas 
• Levies such as council tax, property tax

Other things to keep in mind are:

• Ongoing Expenses: Beyond the mortgage, there are ongoing costs such as property taxes, insurance, maintenance, and possibly homeowners’ association (HOA) fees, which can add up significantly.
• Higher Interest Rates: Financing a second home often comes with higher interest rates compared to a primary residence, reflecting the increased risk to lenders.
• Capital Gains Tax: If your second home increases in value and you decide to sell, you may be liable for capital gains tax on the profit.
• Additional Stamp Duty: In the UK, buying a second home attracts a higher rate of Stamp Duty Land Tax, increasing the purchase cost.
• Property Value Fluctuations: Like any real estate investment, second homes are subject to market conditions that can fluctuate, potentially affecting the property’s value and your return on investment.
• Upkeep Responsibilities: Maintaining a second home, especially if it’s not regularly occupied, can be challenging. Issues like security, repairs, and general maintenance require time, effort, and money.
• Rental Challenges: If you rent out your second home, you’ll face the responsibilities of being a landlord, including finding and managing tenants, dealing with vacancies, and ensuring the property meets legal rental standards.
• Time and Energy: The effort required to manage a second property could be devoted to other pursuits or investments that might offer better returns or personal satisfaction.

Understand the stamp duty surcharge

When purchasing a second home, you will incur the additional rate of stamp duty tax. Stamp duty tax on a second property would see an extra 3% on your stamp duty. This would mean that on a second home purchased for £500,000, you would pay an extra £15,000.

However, if you sell your second property within three years you can claim back the 3% stamp duty surcharge. Just remember that you may incur capital gains tax on the sale of the property depending on how long it’s rented out for and if you sell it for more than the purchase price. 

Taxes

Rental income is taxed as income. While some allowable reductions are available, if you’re a higher rate taxpayer it will be taxed at 40%. 

Upfront Costs

For any property you purchase, it’s likely that there will be upfront costs to get the property ready for rent. Such as gas safety, electrical safety, fire safety. There will also be the ongoing maintenance costs.

Work Required

Being a landlord requires work and a second buy-to-let property won’t become a passive investment. A lot of effort comes with renting out a home, and if you get an agency to cover the work you’ll still be required to pay a fee.

Void Periods

With your buy-to-let property there may still be occasions when you cannot fill the property. You’ll need to account for void periods that may mean you are not making a rental income. 

Rental demand too can ebb and flow. Even if you reduce rent to attract tenants that may mean you have to top up mortgage payments with income from somewhere else. 

Your Equity is Tied in up Property

Property is not a liquid asset. When purchasing a second home you get a material asset you can sell for cash but be wary that if there is a dip in the market and you need to sell, you may incur a loss, or, as a worst-case scenario end up owing the lender more than you paid for it.

Interest Rates

We’re currently in a low-interest environment which means borrowing remains cheap. However, this isn’t always the case, and in the 90s interest rates climbed, which put pressure on those with variable-rate mortgages over fixed ones. 

It’s important to crunch the numbers and explore different scenarios before getting involved in buy-to-let. Having an idea of the best and worst-case scenarios for your mortgages will help you plan for covering any shortfall should interest rates change. 

Should I Rent Out My Second Home?

Renting out a second home can be a good strategy for homeowners and provide a steady stream of income. However, be aware that it may not work out the way you hope and owning a second home can come with roadblocks. 

The pandemic was a good example of when things may not go according to plan. Some landlords experienced months without income from the property while still having to pay the mortgage, taxes, insurance and other fees. Those without savings or reserves can find themselves in financial difficulty. 

Additionally, it may be worth finding a property management company which can take care of tenant selection, rent collection, maintenance and other tasks related to managing your second home.

What Tax do you Pay if you own Two Properties?

Once you own two houses, you have two years to decide which is your principal private residence property. A principal private residence is exempt from Capital Gains Tax implications. So this is a significant decision, and most people choose the property which is expected to rise most in value.

Second property tax will apply to landlords as they have to pay annual landlord income tax at a rate determined by their income tax bracket. Be sure to consider the impact of rental income on your tax status, as you may find yourself unexpectedly pushed into a higher tax band. 

Finally, if you decide to sell your second property, you will have to pay Capital Gains Tax on the profit made from the sale.

Capital Gains Tax on a Second Property

When it comes to selling your second property, you won’t be charged capital gains on the full sale value. But you will be charged on the additional gain over what you paid for it. Capital gains tax is not charged on the main residence but applies to properties that are deemed an investment. 

Basic rate taxpayers will be 18% while additional rate taxpayers pay 27% on gains made from selling an investment property. If you’re wondering how to avoid capital gains tax on second homes in the UK, capital gains tax does not apply if your gains fall under the annual allowance of £12,000.

If you are looking to sell your second property, you should also consider the other costs associated with the sale. You will need to factor in estate agent fees, legal costs, and any other related expenses. Additionally, if you have made any improvements or repairs to the property since you bought it then these costs can be deducted from your gain, reducing the amount of capital gains tax you will pay.

It is always best to seek professional advice when considering selling a second property in order to make sure that you are taking all available steps to minimize your tax liability.

Tips for First-Time Landlords of Second Homes

Analyse the returns

Before deciding to let any second home as a rental property you’ll need to analyse a few things. Starting with the returns alongside the expenses of being a landlord. Be sure to assess the property’s rental yield. Rental yield is the annual return on the investment from your property, something between 5-8% net is a reasonable figure.

Consider Letting Expenses

While a strong rental yield and capital growth can be enticing, be sure to take into consideration all the expenses that come with letting. These include:

• Mortgage interest payments
• Tenancy void periods
• Compliance and inspections
• Insurance payments
• Agency fees
• Get the Property up to Standard

Landlords have a number of responsibilities when it comes to letting a home, these include things like:

• Gas Safety Certificate: you’ll need to get this certificate which shows the safety record for all gas appliances and shows they are up to standard within the property.
• Fire Safety: All furniture and appliances need to meet minimum safety requirements. You’ll need to install a smoke detector and carbon monoxide alarm.
• Energy Performance Certificate: This is a certificate that provides information on the property’s energy use and the typical utility costs. 
• Licencing: If your property is a HMO, you’ll need to apply for a licence from the local council. Some councils will require a licence no matter the type of rental property.

Deposit Scheme and Right to Rent

Tenancy deposits need to be registered with a government-approved scheme. Landlords are also legally required to comply with Right to Rent. The mandated checks all landlords must conduct for tenants regarding their right to live in the UK. Landlords must also give their tenants a copy of the UK Government’s How to Rent Guide before they move into the property.

Tenancy Document – Landlords need to take care of all the administration involved in the tenancy. This means having a contract in place. Also making sure tenants receive copies of all relevant documents as required by law. Including the tenancy agreement and compliance documents.

Rent – Once you have gotten all the necessary checks and documentation out of the way, ensure you get the first month’s rent and deposit before granting access to your property.

When should you consider buying a second property?

Considering buying a second home as part of your property investment strategy is a significant decision that should be timed and executed based on several key factors. Here’s when it might be the right time to take this step:

Financial Stability

Before considering a second property, ensure your financial foundation is solid. This means having a stable income, healthy savings, and manageable levels of debt. The financial responsibilities of a second home include not just the purchase price and mortgage payments, but also ongoing costs like maintenance, insurance, and property taxes.

Equity in Your Primary Residence

If you’ve built substantial equity in your primary home, it may be an opportune time to leverage that equity to finance a second property. Equity can serve as a down payment for the second home, potentially allowing you to purchase without tapping into liquid cash reserves.

Clear Investment Goals

Define your investment objectives clearly. Are you looking for short-term rental income, long-term capital growth, or a vacation home that can also generate rental revenue when not in use? Your goals will influence not only the timing but also the location and type of property you should consider.

Lifestyle Stability

Consider whether your current lifestyle and future plans align with owning a second home. If you anticipate significant changes, such as a career move or family expansion, it might be wise to wait until your situation stabilizes.

Risk Tolerance

Investing in a second home involves risk, including the potential for financial loss if property values decline or rental income doesn’t meet expectations. Ensure your risk tolerance and investment strategy align with the inherent uncertainties of real estate investing.

If you’re looking to buy a second home to rent out, the ability to earn money through rent to pay off the mortgage has huge appeal, as does the possibility that your property will grow in value. While owning a second home to rent out can be a great investment, there are pitfalls to look out for. As a buy-to-let landlord, make sure you take into account the expenses you’ll incur. As well as tax and your responsibilities as a landlord. A second home can certainly be a beneficial endeavour if you thoroughly take time to understand all the nuances. To find out more about buying a second home, get in touch with our expert property team today.