Your Money: A weekend idyll, or the holiday home from hell?
Dido Sandler looks at ways to ease the financial headaches of buying a cottage as a second home
Sunday 26 May 1996
However, whatever estate agents might say, buying a property is not a cheap holiday alternative. For example, payments on a pounds 50,000 mortgage, plus other costs including insurance, council tax, maintenance and bills, total around pounds 5,000 a year. That sort of money could buy you 16 weeks a year in quality cottages up and down the land.
Then there are the costs associated with any purchase: legal and surveyors' fees, stamp duty, and, if you put down a deposit of less than 25 per cent, a mortgage indemnity guarantee. Migs are a sort of negative equity insurance for lenders and might cost many hundreds of pounds. Further, you can only get mortgage interest relief on your main home (although you can choose for one or other property to be exempt from capital gains tax - a potential issue when you come to sell).
One possible solution is to buy with friends or family, so splitting the costs without necessarily harming your enjoyment of the cottage - especially as you won't always be there at the same times. There are risks, though. "You need to be very careful of the people you choose. If one won't pay up, the others are liable for the mortgage debt'' said Patrick Bunton, manager at London and Country, a firm of mortgage brokers in Bath.
A legal contract should cover eventualities such as when one of the joint owners wants to sell up. Will the other owners want first refusal? Will you want to share with a stranger? Or will this mean selling the property?
The typical way of paying for a second property is to arrange an increase in your existing mortgage. Those with equity in their main home should be best placed for the cheapest deals and, even though the loan size will increase, the discounts available on remortgages may even mean you can cut your overall monthly outgoings, at least in the short term.
Even if you do not have equity in your main home, you may still be able to get a good deal if the mortgage is not too high a multiple of your income. Say, for example, you and your partner earn pounds 50,000 between you and you have a pounds 75,000 mortgage; your lender will probably authorise a further pounds 50,000 for a second home. But it may insist on a 25 per cent deposit.
If you plan to let out the second property, and repay the mortgage from rental income rather than your own money, most lenders will only lend at commercial rates, which are up to 4 per cent above the standard mortgage rate.
A few companies are more flexible. The Halifax's Second Asset Mortgage accepts up to half the repayment from rental income, with interest rates going from as little as 4.99 per cent fixed until July 1998. The maximum loan size is 75 per cent of the value of the property.
Mortgage Trust, a specialist lending arm of Ireland's First National Building Society, allows 80 per cent of repayments to come from the rent on a deal costing 8.99 per cent fixed for five years.
In terms of income tax on the rent, you can offset costs like mortgage payments and upkeep against rental income, proportionately, for the amount of time you let out the property. If it is four months, you can offset a third of the year's expenses.
Insuring your holiday home can be tricky. Many insurers will only provide cover if your first home is already with them. And still they impose onerous conditions. Norwich Union, for example, insists the central heating is left on between October and March "to minimise the risk of burst pipes damaging the home without being noticed for months''.
Watch out for exclusions, too. Direct Line's contents policy does not cover money and valuables, frozen food, home entertainment equipment or garden contents. If the property is let out, contents cover may be refused altogether.
Holiday Homes, a specialist broker in Romford, and the AA, are among the few firms interested in insuring second homes on their own. For a combination of pounds 50,000 of buildings insurance and pounds 8,000 of contents, Holiday Homes charges a standard pounds 173 a year. The AA asks for pounds 181.20. Both allow holiday lets for a limited period but exclude accidental damage, and Holiday Homes excludes theft unless following forcible entry.
q Barclays Bank is offering a free prize draw for vouchers worth pounds 500 towards a holiday in a National Trust cottage. Entry forms are available at the bank's branches.
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