Thinking Of A Second Home? Here’s What You Need To Know
It’s become the ideal British pursuit and something of a symbol of the thriving middle-class set – the much-coveted, second home. There are very good reasons for this too if you’re lucky enough to be in the position where you’re able to secure a second home and if you keep making good financial choices that can keep both your properties adequately serviced, then you’ve set yourself on a very good course towards financial freedom in the future.
However, as with all decisions that involve long-term financial planning and commitment there are a few things that you need to know first.
GETTING YOUR FINANCES IN ORDER
Before you can even think about logging on and searching for your next home you first need to be 100% certain of what your current financial status is. Check your credit score, conduct a thorough cash flow analysis on your monthly outgoings versus income and remember to include your savings plans and current savings totals into that picture. Ideally, you should have at least 3 paycheques worth of savings in your current account. This is over above your “rainy day” account and retirement/pension funding. This means that if you’re like most British families, you’re probably only saving around £450 a month and if you’re planning on successfully applying for a second mortgage, this will need to change. Remember, we’re talking long-term planning here and getting you into the right “state” to be successful in your property pursuits is part of that planning. So if it means that you need to take a year, or even a bit more to get your finances in order then it’s a journey well worth taking.
HERE ARE THE TOP TEN CONSIDERATIONS TO FACTOR INTO YOUR PLANNING
The costs of buying a second home – there are indeed some extra costs to plan for when considering your second home purchase that didn’t need to be thought of when you bought your first home. For example, when you sell your second home eventually, you will be subject to capital gains tax which you won’t have to worry about on your first home. So be sure to get good advice from a reputable agent and your banker in the lead up to your hunt for an investment property.
Financing your second home – you might think that because you already have an existing mortgage that this will make getting a second mortgage easy. Well, this is not necessarily the case. Financing your second home is going to depend on your current financial status and even if you’re “buying to let”, you’re still going to need to show evidence that you can afford both your mortgages. See how much you could qualify for or what your payments could be by using mortgagecalculator.uk
You’re going to need a much bigger downpayment – your second mortgage comes with many benefits and in the long run, you’re probably going to come out the winner, but you are also going to have to shell out a decent bit of cash to get you started. Most banks will require a 25% downpayment on your second home and in some cases – even more.
Keeping the taxman informed – if you’re planning on moving your primary residence to your new second home, then you’ll need to let HMRC know or you’ll have tax issues that you may not have counted on.
Location (Location, location) – it doesn’t matter how many times you hear this adage, it’s never going to be heard enough. It was important when buying your first home and it’s as important, if not more so, now. You have to be wise and ensure that your loan to rental income ratio is sufficient. This means that you have to be able to collect enough rent to cover most, if not all of your mortgage payments.
Death and taxes – There are obvious tax implications on multiple properties and this is going to have a big impact on how you handle your estate planning. This is one area that you have absolutely must get right, so get some professional guidance in any event.
London’s golden streets – the nation’s capital is the proverbial goose when it comes to property investing and if you can manage to secure your second home here and in the right area, you’ll virtually never be shy of a tenant. You will need a good estate agent regardless of where you’re planning to buy but certainly, in London.
Insurance matters – if you’re planning on a second property as a rental income generator you’re going to need to ensure that you’re adequately covered for just about any eventuality and this will have to be factored into your monthly financials.
Missing payments – if you get a second mortgage and at some point run into some difficulty, you could get into some trouble a lot quicker than if you only had the one property, so be sure that you have sufficient savings to act as a buffer in the event your tenants let you down or face difficulties of their own.
Some good news on tax – if you’re planning on buying a second home in the same district as your first, you may qualify for a discount on your council tax, check with your agent.
If you’re serious about the property game, you’ll want to get your properties paid off as soon as you possibly can, ideally your primary residence first. To accomplish this you might need to start looking at developing additional streams of revenue that you can pay into your mortgage over and above your regular payments, any additional payments go straight towards your capital debt and not the interest and this instantly lowers your total amount owed. This has a ripple effect the more you pay into your mortgage over longer periods. Speak to your banker to make sure that your loan contract allows you to do this without penalties.
The exciting part of second homeownership is that it means you’re probably managing your current financial situation rather well and this is your reward. Property as means to establish a future-proof buffer is a great idea if it’s managed well and done within realistic expectations and abilities. Always get good advice and deal with agents and financial institutions of repute.