The rate of homeownership in England is somewhere around 65%, according to official figures, and about 10% of Brits also own a second property. These are mostly buy-to-let investments (including holiday lets), though some are second homes.
In the last 30 years or so, property has proved to be an excellent investment vehicle, generating healthy returns and consistently defying doom-and-gloom prognoses of a housing market crash. No wonder that the idea of purchasing additional property has widespread appeal.
That said, if you look at our economic climate, it is clear that we are experiencing volatility. There are many factors feeding into the current situation that are expected to have an impact on the housing market, such as:
- the cost-of-living crisis
- rising inflation
- an ongoing war in the Ukraine
- recovery from the pandemic, and
- post-Brexit difficulties.
The trouble is nobody knows exactly what or when this impact will hit.
Whether your best decision is to buy now or wait until next year to invest in property is largely a question of how you interpret the figures. “Unfortunately, there is no simple yes or no, do it or don’t do it, binary answer because that’s not how life, or the property market, works. There are so many variables. And it’s going to be different for every individual investor,” advises one property expert.
With that in mind, let’s take a look at some of the key questions you should consider.
The most common route to second home ownership is via a mortgage. Lenders tend to have stricter requirements for second properties, so if you can pay off the mortgage on your main home first, you’ll be in a much better position. For the over-55s, there’s also the option of using an equity release plan to help with the purchase.
Mortgage companies require larger deposits (at least 15%) for second properties before they are happy to approve a loan. For specialist buy-to-let and holiday-let mortgages, you will typically need to pay 25-30% upfront. The bigger the deposit you can put down, the better the mortgage deal you will be able to get, so there’s an incentive to save!
Assuming you own your main home, any additional property you buy will be considered by the taxman as a secondary residence. This includes buy-to-let and holiday-let properties. Bear in mind that secondary residences are subject to a 3% surcharge on the usual stamp duty (SDLT) and factor this into your budget. What’s more, when you come to sell your second home, any profit you make will be subject to capital gains tax (CGT).
Your choice of second property will be determined by the available budget as well as what you want to use the property for. Are you looking for a weekend bolthole where you can relax and recharge away from the hustle and bustle of city life? Does your job take you to different parts of the country and you’d love your own pied-à-terre rather than staying in hotels? If you’re buying a second home for yourself or your family to use, the return on your investment will depend on capital growth over the duration of your ownership.
Maybe you like the idea of a pretty country cottage or seaside pad for longer breaks that could generate holiday-let income when you’re not using it? There are many options when it comes to buying a holiday home in the UK, both in terms of types of property and desirable locations.
Investing in holiday-let accommodation has many obvious attractions. Some would say it combines the best of both worlds, providing free holiday accommodation for yourself and your family while producing income when you’re back home. You may even be able to buy the property with a normal residential mortgage if you’re only planning to let it out for a few weeks a year.
And, who knows, if you love the location and the lifestyle it offers, you could decide to move to your second home permanently. You don’t have to be a retiree to relocate to a beautiful part of the country. Just check that the property has planning permission to be residential all year round.
If you choose to run a permanent holiday-let business, on the other hand, there will be tax implications. A furnished holiday-let that is available for rent for at least 210 days a year is classed as a business. This means your rental income is taxable, but you are allowed to deduct relevant property expenses and claim certain allowances and reliefs.
If you’re looking for a solid income stream, perhaps a regular buy-to-let property is a better choice. Whether you’re targeting students, young professionals or families, rental properties are in high demand all over the country. Of course, the holy grail is to achieve the double goal of capital growth so work out whether this will be a sound investment. Take full advantage of any surveys you undertake and interpret what the findings reveal from a purely cost perspective. Use the survey to work out if your investment does have the potential to achieve the healthy rental yield you’re after.
With rental properties, it’s highly advisable to do as much research as you can before you buy. Make sure you speak to local lettings agencies to get a feel for the market, the target audience and the realistic rental yield you can expect to achieve in your chosen area. In some cities, notably Liverpool, Glasgow and Leicester, rental yields can be as high as 8% while other locations are nearer the 3% mark. Speak to a mortgage broker to help you get the best deal and bear in mind that mortgage interest relief is no longer on offer for higher-rate taxpayers.
Being a buy-to-let landlord can be a hands-on job. You’ll have to deal with your tenants as well as ongoing building maintenance, or instruct an agent to manage the property for you which will eat into your profits.
Finally, you may want to try your hand at property development. Buying a tired flat or house at a discount, refurbishing it and selling it on at a profit is known in the trade as ‘flipping’, and many a savvy investor has been able to smile all the way to the bank after a successful project.
Of course, going down this route carries an element of risk particularly in the current climate of rising interest rates. What if you haven’t budgeted enough for the renovations or build? What if the work takes longer to complete or the property takes longer to sell? What if house prices aren’t rising as expected? Make sure you have a big enough safety buffer to absorb any unforeseen problems and still make a profit.