Having a second home near the coast or in rural countryside location is dream for many people, but few will have the necessary funds to buy one outright. Even if you do, do you really want to tie up all your savings? Mortgage finance is the option many people take, but this has become more difficult to obtain in the current economic climate. So how do you approach securing a loan for a second home?
How will you pay for it?
The first thing to do is to consider how you plan to make the repayments. If you expect to use your existing income you can look for traditional mortgage deals, but if you plan to let the property you’ll need to find a lender which considers holiday lets. The repayment schedule for the loan will be calculated differently if the property is being let, which also depends on the way it is let – short-term or assured shorthold tenancy. Then you need to consider how much you are willing to put up as a deposit. The basic rule of the current market is that the bigger your deposit, the more choice you will have in terms of products and the better the rates will be. Deposits in the region of 20 to 25 per cent of the total property value are fairly typical requirements.
Once you have identified a property, you need to find out if there are any restrictive covenants that apply to it. Some properties may only be used for second home purposes or you may only be allowed to use it for 11 months of the year – these are things that the lender must know before calculating the deal offered. Budgeting for a holiday home is about having a maximum price in mind and sticking to it, and this includes the mortgage arrangement fee, legal costs, survey and valuation fees and stamp duty.
You should always shop around when choosing a mortgage, so speaking to an expert whole-of-market mortgage adviser is a good idea. For all the different options that are out there, mortgages fall into three broad groups: interest-only mortgages where you only pay the interest on the loan each month, repayment mortgages which mean you pay of some of the interest and some of the loan value each month, and equity release mortgages, which free-up value from your primary home to pay for the new one. The latter option means all your payments will be in one place, but it is important to know that both properties will be at risk if you get into financial difficulty.
Is it viable?
Once you have your mortgage offer, you need to do a full cost breakdown to make sure the whole project is financially viable. Take all your overheads into account and work out what rental income you will need to obtain from the property to break even, then consider whether this is a realistic prospect. Overheads include mortgage payments, insurance (you need building and liability if you’re letting), maintenance and repair costs, management fees, agency fees and the cost of marketing your property to attract tenants.
If you want to make an income from your holiday let, you need to work out your return on investment (ROI). Dividing your annual potential income by the value of the property (minus overheads) gives you your net ROI. A figure of between four and five per cent is typically considered economically viable.
Lastly, if you’re buying abroad you need to get a firm grasp on taxation laws in that particular country. You will have to pay tax on buying the property and on your rental income, although some countries have a double taxation treaty with the UK so you don’t pay tax at home and abroad. If you will be spending much of your time abroad, registering as a resident in that country may be a way to reduce your tax burden. Register with an accountant and record all your incomings and outgoings for taxation purposes, but keep an eye on the news too – many European countries facing economic hardship are proposing tax changes in the near future and these could change the viability of your purchase.