Property is one of the most viable investments an individual can make. Property markets typically weather difficult economic times well, with short-term crashes giving way to long-term rises in value. Property is one of the most reliable assets for protection of wealth, and a great way to grow it.
As such, the acquisition of additional property – on top of your existing home – can seem a shrewd decision for actively seeking to improve your finances. This is especially the case where the option to let the property out is presented. But what should you know before you set yourself down this path?
First, it is essential to gain a simple understanding of the costs inherent to buying a second property. They are only roughly equivalent to the costs and charges you will have experiencing buying your primary property; anyone looking to expand their portfolio without understanding that second properties inherently more expensive is in for a nasty surprise.
Not only are there different expectations from lenders and regarding deposits – more on which later – but the fundamental costs associated with property portfolio expansion are higher. Stamp Duty, for one, folds in a significant 3% surcharge on additional property purchases. Mortgage rates for second properties are also typically much higher, on account of both increased risk and the implication of increased access to capital.
Expectations on investors in additional property differ greatly from expectations on conventional homebuyers, too. This is because second properties represent a large degree of financial investment and risk, with cost on top of primary home maintenance racking up over time. Lenders and sellers want to be comfortable in dealing with you, and hence demand higher thresholds to minimise risk.
This manifests most obviously in deposit thresholds. Where a primary property can be secured with 5% of its value in the form of a deposit, sellers and lenders alike typically look for a deposit of at least 15%. For some financial tools – like, for example, buy-to-let mortgages –, you may even need a quarter of the property’s value available in the form of a deposit.
Of course, you would be hard-pressed to find a property investor with the liquid capital to outright purchase properties for their portfolio. Shrewd investment is the proper management of risk, and the careful weaponisation of financial mechanisms that enable enrichment. One of the simplest routes to acquiring additional property is through leveraging one’s initial property, wherein the value of one’s home can secure larger funding towards a new property.
If you’re buying a property for rental purposes, though, this opens you up to the option of buy-to-let mortgages. These are unique financial instruments that enable mortgage-holders to simply pay the interest on the mortgage for a period of years, before paying the debt in full at the end of the agreement. As mentioned earlier, these mortgages have a high deposit threshold, making it necessary for you to have the financial cushion to afford a second property and its maintenance to begin with.