Tips for Buying a second home
The lure of owning second home can be strong but don’t take on
such a serious financial commitment without thinking it through properly
first.
Ten years ago, it probably would have been shares, as prices shot up and
everyone fancied themselves as the ultimate capitalist investor. Today,
despite a recent stock market recovery and faltering house prices, the
in thing remains property.
Let’s face it: bricks and mortar feel a lot safer than the seemingly
abstract concept of owning a handful of paper shares in a company.
And, even if it is not bought specifically as an investment, the notion
of a second home as a weekend and holiday retreat from the hurly-burly
of work and all other attendant pressures has a powerful appeal.
No wonder that, according to the government’s 2001 census, there
are some 200,000 second homes in the UK and hundreds of thousands more
across the Channel, in France, Italy, Spain, Portugal and Florida. And
the numbers will have shot up in the four years since then.
Meanwhile, the Treasury is preparing to relax pension rules, offering huge tax incentives for those wishing to place residential property into a self-invested pension – thereby potentially sparking a vast boom in the scale of investments into second homes.
If you are tempted to join the estimated 250,000 second home buyers expected
to take advantage of this tax bonanza in the coming years, here are 10
top tips - both for and against - before you take the plunge.
1. Search for the real you
Implicit in the notion of buying a second home is the assumption that
you will be spending a lot of time there. We are talking about weekends
and a substantial part of your holidays each year.
Does this describe you? Are you really the type who is attracted to a
single location and who therefore goes back every year for a decade or
more?
Or are you the kind of person who prefers a different experience every
holiday?
If the latter description sums you up better than the former, maybe a
holiday home is not for you – but a motor home is.
2. Is this purchase the right financial priority for you?
Buying a second home is expensive. Unless you have come into some money,
you will be taking on another hefty mortgage.
The difference this time is that this is not a debt that can be justified
by telling yourself that you need a roof over your head.
Different – and potentially stricter - financial considerations
apply to that of a main home, for example:
• Have you paid off all your other debts?
• Do you have an emergency cash fund?
• Have you got enough money saved up for your kids’ college
education?
• Are you putting enough money into a pension? Or is this home your
pension?
3. Will you be able to afford a second home?
We are not talking about a mortgage here, although that too.
The reality is that ANY home involves a lot of expense:
• Council tax
• Maintenance
• Travel
• Insurance
• Utility bills
Except that in this case, you will be paying this expense twice: once
for the first home and once for the second.
Add up how much you pay on the upkeep of your current home. You won’t
be too far out in terms of the costs of the second one.
4. Work out the long-term tax benefits of buying a home
From April 2006, it will be possible to place a residential property into
a so-called Self-Invested personal Pension, or Sipp.
You will be able to use any money in the Sipp to buy the property, plus
you will be allowed to borrow up to 50% of the money already saved up
in the pension.
So, for example, £100,000 in a Sipp allows you to borrow a further
£50,000 – which means you can buy a £150,000 property.
The advantage of placing your money into a Sipp is two-fold:
• The taxman offers generous tax relief for you to put money in
a pension: for every £78 you put in as a basic rate taxpayer, the
Inland Revenue chips in £22. If you are a higher rate taxpayer,
you can claim back another £18. In effect, a £100,000 second
home cost £78,000 – or even £60,000 - of your money.
• All assets in the Sipp grow in value free of tax, either annual
or on disposal.
For more details, read my in-depth article on this subject
5. Decide how long you want to be there
The aim of this exercise is to help you decide where to move in the most
economic way.
You may decide that you plan to be there for, say, 10 years.
If so, factor in not just the costs of buying a place – including
solicitors’ fees, stamp duty, mortgage application fees, valuation
and surveyors’ costs.
Then add the cost of doing up the place while you are there, the cost
of selling and moving on afterwards.
It may make more sense to look for a newer property needing less work
to it, for example, or one that is cheaper.
6. Beware of shared purchases
It can make sense to buy a place jointly with someone else you know well.
After all, if neither of you plan on living out there full-time, sharing
expenses can halve the cost of living in your favoured place.
From next year, it will be possible to buy jointly AND for both of you
to place the property in Sipps. Prepare for huge swap websites, in which
people will be appealing for others to join them in a Sipp-based shared
property purchase.
Equally, shared purchases can be hell. You may end up with someone whose
idea of cleanliness and tidyness, using each other’s food, or paying
bills in a timely manner, differs from yours. That includes people you
may have known for a long time.
7. Don’t buy on a holiday whim
All of us have found ourselves gazing through an estate agent’s
window while on holiday.
But it may not be the best time to buy: you will be feeling demob happy,
desperate to continue the idyllic holiday you have been enjoying.
It makes more sense to come out outside of the holiday season, when the
weather is a bit rougher, when some or all of the tourist infrastructure
has packed up for another season.
That will give you a greater sense of what a place is like – and
also to see more properties and perhaps even to negotiate a bargain.
8. Plan before you look
That way, you know how much you can afford. You are also a more credible
buyer.
You should be thinking in terms of all the bills, plus working out the
monthly maintenance and living costs.
Also, you need to check out things such as transport links, how affordable
and reliable they are and how long it will take to get to your destination.
For regular weekends away, more than three to four-hour journeys are painful.
9. Don’t buy with some future dream in mind
In other words, if you are buying, it should be with TODAY in mind, not
some future point in time when you imagine to yourself that you would
like to retire in this location.
For all you know, in 10 or 20 years’ time, you will absolutely hate
the place. Or else it will be totally impractical. Or the area will have
changed compared with when you bought into it.
10. A second home is not always an investment
Yes, bricks and mortar can be sold. And yes, property prices should rise
over time
But it is just as likely that by the time you have factored in all the
costs we described earlier, that the real gains you make are much smaller
than you first imagined.
Now, actually, there is nothing necessarily wrong with that. A second
home ought to be just that: a home.
Which means you shouldn’t kid yourself that you are bearing all
these huge expenses because the home is a wonderful investment. It may
turn out not to be.
And looking at it from the other point of view, if you really want an
investment, maybe you should go for something blander, easier to maintain,
in a more touristy location, with cheap furniture and less personality
than you would want to live in yourself.
Ultimately a second home is bought for pleasure and enjoyment. The financial
costs are the quid pro quo you pay, in exactly the same way as a hotel
stay must be paid for.
Finally
There is a strong chance that, despite my top 10 tips, you have decided
to power ahead and buy somewhere. And now you don’t like it any
more
Which brings me to my final tip: always buy somewhere with an easy exit
strategy, where you can sell simply and easily, without too many taxes
and other unknowns.
At the end of the day, buying somewhere is only half the story. The other
half is selling the same place when you no longer want to live there.