The dream of owning a second family home is becoming more of a reality for an increasing number of UK residents. Almost 1.6m people in England and Wales own a second home according to the most recent (2011) Census.
Given the great British love affair with property – and the increasing number of us who see property as a potential alternative to a pension – these figures look certain to grow.
However, while it is easy to get caught up in the excitement of the dream it is essential to remain realistic. With the average UK house price hitting over £197,000 in October 20151, second-home buyers should do their sums very carefully and pay meticulous attention to detail.
Do your research: Irrespective of size, a second home may require a considerable outlay, so think carefully about both financial implications and location. Don’t just stick a pin in a map. Visit a shortlist of locations and if possible experience them in all seasons – your rural idyll may not be quite so perfect under three feet of snow.
Ask around – it’s amazing how much you can learn by quizzing the locals: shopkeepers, taxi drivers and next door neighbours will all be valuable sources of information. So, too, will estate agencies and solicitors who can add local insight about the market. If the area is already crowded with second homes, find out how that affects the local lifestyle; for example what is it like off-season? In short take sufficient time to establish whether your preferred location is the right one for you.
“However tempting the property is, don’t be an impulse buyer,” warns Jonathan Cunliffe of Savills estate agents in Truro, Cornwall. “You might find yourself having to move again to get exactly what you want. Take advice about what you want to buy and where, to avoid repeating common mistakes.”
Plan for the long term: Ask yourself why you want a second home in the first place and be honest and specific with your answers. Will it be a buy-to-let investment, a holiday home or an escape from the rat race? Or is it an investment or financial planning for your retirement?
Your answers to these questions should help you make choices. For instance, a rental home in remote countryside, no matter how picture perfect, may attract far fewer bookings than a superficially less desirable property in a bustling village with shops, restaurants and a village pub.
Visualise your second-home lifestyle and decide if you can achieve this in your chosen location.
Work out your ‘commute’: It is also worth considering how long it takes, realistically, to get to your new destination. Think about how many hours you are prepared to spend in a train, plane, bus or car getting to your holiday home. These are boring practicalities but essential to consider - especially if this will be a second family home.
Consider local access too. How far is your holiday home from the main road; how easy is it to get to? Could you still pop into town to go to the theatre or see a movie?
Maintenance issues: Running a second home remotely can be challenging. Consider what routine jobs would need to be done and who could do these.
If a holiday guest calls to say the boiler is broken, what would you do? Who could change the bedding between rentals or pick up your mail? Thinking how to cover all eventualities and making a list of local tradespeople will pay off in the long run.
The rental calendar: The great British weather can make certain locations difficult to reach and potentially hard to rent for parts of the year. Think about this, and how you might want to use your property yourself at a time when it might yield the maximum rent. How would that affect any projected income?
Be conservative with your calculations: Over-estimate your costs and under-estimate your income. Expect the unexpected. If you are renting out your holiday home, factor in the impact of non-rented periods.
Agency letting costs can swallow up to 12% of the yearly rent – or twice that if you’ve engaged the agency on a full management contract.
Remember that legal and agency fees could add an extra 3% + VAT to your buying and selling costs, and stamp duty currently begins at 1% on property over £125,000 and rises to 7% on values over the £2m mark.
Owning and selling a second home, particularly if it has increased in value during your tenure, has potential tax implications, so it is important to get specialist tax advice.
Read up on the law: The UK’s private rental sector is highly regulated, both from a safety and a tax perspective. These could range from fire regulations and minimum safety standards regarding the condition of your property to what expenses are and are not tax deductible.
Legislation governs every part of the rental process, with separate regulations for furnished or unfurnished properties and for short- or long-term leases. Familiarise yourself with these before signing on the dotted line and take appropriate professional advice in these specialised areas as needed.
Get the right mortgage: Securing finance for your holiday home is likely to be one of your biggest challenges so seek expert advice to find the most appropriate mortgage. You want to ensure, as far as possible, that your purchase is a sensible investment taking account of all your circumstances and attitude to risk. Some may be able to afford a holiday home without a mortgage but this might not be the best approach to take given that tax relief may be available on the interest.
As always with tax, it is sensible to discuss your position with a professional and find out how owning a second home might affect your tax status.
Rent: For the majority of second-home owners potential rental yields will be the deciding factor. These vary dramatically from region to region or in a specific location, and the condition of the property will inevitably have an impact.
According to Sam Butler of estate agents Butler Sherborn, typical country yields - although these cannot be guaranteed - are around 2.5% to 3.5% of the capital value. Sam also estimates that holiday lets are around 10% but this depends on occupancy rates and the cost of advertising, letting charges and weekly cleaning costs.
A second home in good condition and in the right location could be a gold mine as well as being somewhere away from it all for you and your family to enjoy. Always bear in mind, however, that if you rent out your rural, seaside or village retreat for all or even part of the year this will have financial, legal and tax implications.
1. Average UK house price rises to nearly £197,000, The Guardian, 29/10/15
Any views expressed by Bank of Scotland Private Banking are our current in-house views as at November 2015 and should not be relied upon as fact and could be proved wrong. This article was prepared as at November 2015. The information and opinions may not be accurate after this date.
Lending is subject to our responsible lending criteria. How much we lend, the period and rate available are subject to our assessment of your circumstances. Specific eligibility criteria and conditions apply for certain types of lending. You must be 18 or over and a UK resident to apply. Lending is subject to status and application and security may be required. Your home may be repossessed if you do not keep up repayments on your mortgage. Past performance is not a reliable indicator of future performance. The value of investments and the income from them can fall as well as rise and cannot be guaranteed.
Tax treatment is dependent on individual circumstances and may be subject to change.
Bank of Scotland Private Banking assumes no responsibility for the content or any reliance upon the content of the third party websites detailed in this article.
Bank of Scotland plc. Registered office: The Mound, Edinburgh, EH1 1YZ. Registered in Scotland, no. SC327000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 169628.
Sowing the seeds of wealth management
Discussion of potential investment options for long term investors.
Should private investors return to commercial property?
Analysis of commercial property investment for private investors.
For access to advice from a Private Banking and Advice Manager, you’ll need at least £250,000 in savings, investments and/or personal pensions and/or a sole annual income of at least £250,000.
Before we provide you with any services or products, we will explain and agree with you what advice can be given, the products and services this advice covers and any charges that will apply.
To arrange an appointment with one of our Private Banking and Advice Managers:
Lines are open Monday to Friday from 09:00 to 17:00 (Tuesday and Thursday until 19:00) and Saturday from 09:00 to 13:00, excluding bank holidays. Calls may be recorded or monitored. Call charges may vary.