Property has long been a smart investment move and one we work on with many of our dental and medical professional clients. It’s not an easy option and if you’re considering purchasing a second property as part of your long-term investment strategy, there are a few things you need to consider – cost, tax, time, goals, etc. – which all impact your decision.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Earning money from a second property really comes down to your goals
There are a few ways you can earn a profit from a second property. You could simply flip it (renovate and sell on for a profit), keep it for the long haul and wait to cash in until you’re ready for the cash, or use it as a rental property either to long-term tenants or as a holiday let. There’s no right way or reason to go about purchasing a second property and finances don’t necessarily need to be part of your decision-making process.
When someone is considering investing in a second property, we will talk them through the process and make sure they understand the costs and tax implications involved so they can make an informed decision. To big considerations are tax and mortgages, so let’s take a look at the considerations for these.
Tax
Stamp duty land tax for second homes
As a current homeowner, you most likely paid stamp duty (SDLT) on your first property (with some exceptions) so it shouldn’t come as a shock to learn that your second home will also be subject to SDLT. The downside is that in England and Northern Ireland there is an additional 3% surcharge on top of regular stamp duty for a second residence.
Capital Gains Tax for second homes
You’ll also need to consider Capital Gains Tax (CGT), which is charged on profits you make from selling any valuable possession, including a second home. Any profit you make from selling an asset like a second home is tax-free up to £12,300. After that, your earnings are subject to a CGT rate of 18% as a basic rate taxpayer or 28% as a higher or additional rate taxpayer. The 2021 Autumn Budget could change these rates.
Mortgages
How will you finance your purchase? Most people do need to take out a mortgage on their second property, and there are a variety of ways to do this. The type of mortgage you’ll need depends on what your plan is for your second home because there are special mortgages for buy-to-let and holiday-let properties, but if you’re not renting out the second home, you will still be able to use a conventional mortgage.
Buy-to-let and holiday let mortgages
If you plan to let out your second property, whether as a long-term rental or short-term holiday let, you will need a mortgage that is specifically designed for this purpose.
Usually, you’ll need a higher deposit than a conventional mortgage, usually 25% or more of the total property value, and often, buy-to-let mortgages are interest only. This means you won’t need to make repayments until either the end of the mortgage term (and will need a plan how to pay that sum back) or when you sell the property.
Because the income you can generate from holiday lets is unpredictable and reliant on a number of factors, they are sometimes viewed as more high-risk. As such, they require a specific mortgage that comes with stipulations, such as personal use is limited to up to 90 days per year. You can find either an interest-only or repayment plan depending on your lender.
Ready to build your property portfolio?
No matter your motivations – dreams of a holiday home, a chance to generate passive income, or even as a long-term investment for inheritance or as part of a retirement plan – investing in a second property might be the right move for you.
To discuss how Dental & Medical Financial Services can help you not only purchase your next property but incorporate the decision into your overall financial plan, get in touch with us today.
Want to build your property portfolio?
Mortgages | Buy to Let | Property | Mortgage Planning |
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