Buying a second property is a goal for many capital investors and prudent families. Perhaps you’re considering a weekend getaway, looking for a future retirement property, wanting to size up and rent your current home, or thinking about an investment to pass on to your children. Whatever your reason, you’ll need a solid financial plan.
If you have yet to finish paying off your first home mortgage, buying a second property needs to be a balanced decision. For one thing, the more debt you have – and this includes your first mortgage and any other monthly repayments, such as credit cards – the more reluctant lenders will be. Your income calculations should include your current mortgage repayments, your potential second property mortgage repayments, credit card payments, your day-to-day spending, and upkeep or renovation costs for both properties.
If you are mortgage-free, or have almost paid off your first mortgage, and you have a good relationship with that lender, your simplest route into buying a second property could be to remortgage your first home. This may be easier than trying to get a new lender to approve your second home loan, as nearly all lenders are more conservative now and EU lending laws have tightened.
A second charge mortgage borrows against the equity on your current home. The value of your home minus the amount remaining on your existing mortgage leaves you with the amount of equity you can borrow against for buying a second property. Bear in mind that the mortgage will need to be repaid monthly, just like your first one, and that your initial mortgage takes precedence for repayments over your second. Of course, if you cannot keep up repayments on your second property mortgage, you could lose your second home or both homes.
You should always keep tax in mind when buying a second property. In many countries, the interest on your second home mortgage is tax deductible; alternatively, if you decide to rent the property, you are often able to deduct rental expenses related to upkeep while it is occupied. Your rental income will be taxed, however. The rules vary from country to country, and sometimes within countries too. In Switzerland, for example, second homes are treated as income in kind and are taxed on their ‘rental value’ – calculated on the hypothetical rent, according to market value and cantonal rule – regardless of whether or not you rent it out.
After considering all these important factors, you’ll still need to check any hidden costs associated with buying and selling property.