The second home project
OK, so the fact you’re reading this tells me you’ve probably bought your first home already. How good did that feel? Well let me tell you this – buying your second home feels even better.
Most of us have always been told get on the property ladder with a mortgage, work hard, pay the mortgage off as quick as you can so you are debt free, so you can live your later life with no mortgage to pay. Sounds good right?
Well lets just think about this...
You're 25, you take out a 35-year mortgage so you're ‘mortgage free’ at age 60. Great, you have a house you own but you still have to work to bring money for the bills, food, lifestyle etc.
Some people choose to do the opposite of this plan and purchase a second home...
The dream of owning a second home is one that many people have, but most people don’t quite understand how simple it really is. We have helped clients over the last 4 years make this Second Home Project a reality and want to make this happen for many more.Tell me more!
Here is an example of how it works:
Lets say you’ve owned your family home for 5-10 years. Providing you’ve not increased your mortgage too much in this time, you're probably sat on a nice chunk of equity.
House bought for
Deposit at 10%
Over the next 5-10 years
...the property market in most of the UK has seen house prices go up, and this combined with the payments you have been making, could see your situation now something like this:
As you can see, that £20k investment you made 5 or 10 years ago has treated you well...
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Now, lets put that money to work
Below shows how INCREASING your mortgage can actually REDUCE your monthly outgoings in relation to your income.
Increase mortgage to
Lets say we increase your mortgage to £210,000. You still have £50,000 in the property (£30k more than you started with) and you now effectively have £50,000 for a deposit for a new house.
Now, when you’re buying the next property, its important to understand the difference between buying a new house to RENT or to LIVE IN. Buying a property to let out (a BTL) chances are your going to need a minimum of 25% deposit, so our £50k will limit us to a property of £200,000. If your buying a property to live in, the ideal minimum deposit is 15% (you can use less but this is just what we advise to be safe). You also need to remember that the property you already have needs to be left with enough equity in it, depending on what your doing with it. If you will continue to live there, 15%, but if your letting it out, 25%.
For each scenario, mortgage lenders will calculate the maximum loan allowed, depending on different things. For the property you live in, we use 4.5x gross annual income as a guide. (you can get more but you’ll need to speak to your broker to confirm this). If you RENT the property, the amount you can borrow is based on a very different calculation. Although most BTL lenders will require you to have an income no lower than say £25,000 (some are more, but some don’t have a minimum at all) the way they calculate the maximum loan is based on the rental income that property will achieve. Here is an example with a very typical calculation used.
(Annual rent ÷ 125%) ÷ 4.5% = Maximum loan amount
In real terms
£800 rent per month x 12 = £9,600
(£9,600 ÷ 125%) = £7,680
£7,680 ÷ 4.5% = £170,666 (maximum loan amount)
Again, some lenders will lend more, but also some less, so we suggest speaking with your broker to get accurate figures to YOUR circumstances.
*The above examples are JUST EXAMPLES. We appreciate that everyone’s situations are different, but you can still do this with more/less equity. You just need to speak to the right person to run the numbers for you and give you the correct guidance*
What affects borrowing
- Type of income – basic pay / overtime / bonuses / benefits / maintenance – all of these are calculated differently with each lender
- Outgoings / commitments – Loans, Credit cards, childcare – these all affect how much you can borrow
- Term (number of years you take the mortgage out for)
- How long you fix your rate for (some lenders lend more if you commit to a 5 year fixed rather than a 2 year)
- Other background properties you may already have, these can impact the lending amount
Buy To Let – Property you will let out
- How long you fix your rate for (most lenders lend more if you commit to a 5 year fixed rather than a 2 year)
- Higher rate tax payer will usually get less than a standard rate tax payer
- Buying the new property in a Ltd company name can restrict the amount of lending
As you can see, the principle of getting your second property under your belt is simple. You just need to know how to do it. And as you can see above, there are so many variables to consider. Speaking to a broker who specialises in this can streamline this process, taking all the work and research out of the equation for you, so you can sit back and just enjoy the process.
Please note, there are tones of other possibilities with this to utilise the equity you have even more.
Here are some examples which we have helped clients with in the past:
- Buy a property that can be improved – this could be anything from something that just needs so modernisation and updating, to something that could maybe be extended or renovated. All add value to the property and the return on the investment can be much higher
- Buy more than one – if you have enough equity in the property, there is nothing stopping you put down deposits on more than one new property
- Buy a plot of land – Buying a plot and building a property probably has one of the best returns on investment IF DONE CORRECTLY. We have a page on Self-Build mortgages so check that out for more info
- Holiday let instead of Residential let – with the right property, in the right location, letting your property on a day/weekly basis on Air BnB or through a holiday let agent can seriously increase the return (be aware you need a different type of mortgage if this is your plan)
As you can see, there are so many positives to come from investing in a second property. With this said, there are also some VERY IMPORTANT points to consider that are not so great if things are not done with the correct advice or guidance.
Here are some key things to look out for:
- Stamp duty – when buying a second property, the chances are you could be liable for a higher rate of stamp duty. See our stamp duty calculator page for more info
- TAX – any profits you make on the rental income from the property could be liable for tax. ALWAYS speak with an accountant as well as your mortgage broker when considering a second property
- Interest only vs repayment – a lot of the time BTL or investment properties are taken out on interest only mortgages, so at the end of the term, they are NOT paid off. There are positives and negatives to this so make sure you speak with your broker about this
- Management fees – if you don’t want to deal with your tenants yourself, you can use estate agents or rental agents to do this, but they come at a cost. Again, there are pros and cons to both so make sure you know the difference
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