The financial costs and opportunities of a second home

Most people do not buy a second home to make money, rather because it offers an alternative life in a place they love. However, the romance of a second home should not cloud your financial judgement. With good planning, it might even be possible to make money while having the perfect bolthole to escape the constraints and stress of everyday life.

Buying a second home, like a first one, is not a financial decision to be taken lightly or hastily. The asking price is only the starting point. There will be administrative costs on top, including lawyers’ or notaries’ and estate agents’ fees, as well as taxes, which may be higher than for a primary residence.

In France, for example, the notary’s charges usually amount to between 7% and 8% of the purchase price, including transaction duty and land registration fees. In Spain, the Impuesto sobre Transmisiones Patrimoniales is around 7%. Each country has its own regime, but together the costs can add as much as 10% to the property’s price.

Tax and currency implications

Newly-built homes may come with additional costs. In Spain and France, VAT is charged on new construction, although in some countries governments provide tax incentives to contribute to the housing stock. However, this is another expense that may have to be factored into your costs before taking the decision to go ahead.

Currency considerations should also be front of mind for purchasers looking at buying outside the euro area, for instance in the UK, Switzerland or Denmark.

Currency considerations should also be front of mind for purchasers looking at buying outside the euro area, for instance in the UK, Switzerland or Denmark. The transaction will likely require the conversion of large sums of money that could result in painful losses in the event of currency turbulence.

There are many ways to manage currency: looking for the best bulk transfer rates is always a good idea, but it is relatively straightforward to place forward contracts on the currency transactions you know you’ll need to make in order to obtain predictability. Alternatively, you can just buy opportunistically when the exchange rate is favourable, although this is a riskier approach.

Where and how to borrow

Mortgage loan terms for second homes may be more complicated than for a principal residence, and owners might consider whether to raise borrowing secured against their main home rather than financing the second home directly. However, many leading banks offer dedicated international mortgage loan solutions for second homeowners tailored to their particular requirements, and have specialist advisers on hand.

They are likely to offer borrowers a range of options, depending on factors such as whether ownership of the property is direct or involves a corporate structure, the preferred debt arrangements, the mix between homeowners’ equity and financial debt, and whether capital repayments are spread over the term of the loan or consist of a lump sum at maturity.

Purchasers buying in a non-euro country may consider whether to take out a loan in a different currency. Euro-denominated mortgages have been among the most competitive for over a decade. That said, the rise in interest rates since 2022 calls for careful consideration before making a decision on the currency of the loan.

However, always bear in mind the risk of taking on debt in a currency different from that in which your earnings or other means of repayment is denominated, because of the risk of incurring losses from exchange rate movements. This lesson was brutally brought home to borrowers in other countries who took out Swiss franc home loans before the 2007-09 financial crisis – they were common in Greece, Croatia, Cyprus, Hungary, Austria, Poland and Romania – when the currency suddenly surged against the euro. However, if you expect to earn rental income from your second home, it may make sense if the rent and the loan repayments are in the same currency.

Another consideration is whether you may need to make a will in the country where you have your second home. People who do not are at risk of finding themselves on the wrong side of local inheritance tax requirements, and in France and other countries, including Luxembourg, mandatory heirship rules.

Budgeting for oversight and maintenance

While day-to-day costs such as water, electricity, heating and/or cooling aren’t likely to represent a significant additional financial expense for second home owners, since they won’t be occupying their main residence at the same time, repairs and local taxes can be more of an issue.

Owners who are likely to be away from their second home for long periods of time will probably need someone to take care of the property (and especially any garden or swimming pool) and do basic maintenance. This was a problem for many second homeowners during the Covid-19 pandemic, and it still needs to be considered.

The cost of furnishing a second home should also be taken into account. Your choices are likely to depend on whether you plan to rent it out – in which cases your purchases may be functional and neutral rather than artistic or luxurious – and whether you plan to retire there in the longer term. Nevertheless, renters can be discerning and Airbnb customers judgemental, so a bare-bones approach could be a false economy.

The surging growth of online rental platforms led by Airbnb has provided a much wider range of options for people wanting to rent out second homes

Making a second home pay for itself

The surging growth of online rental platforms led by Airbnb has provided a much wider range of options for people wanting to rent out second homes, although fees will eat into their profit. Conventional estate agents may also be able to provide short-term letting services.

However, many owners of second homes, especially more valuable properties, will continue to rely on informal means of letting out their property, including word of mouth and off-market arrangements.

In many cases rental income will make you liable for income tax in the country where the second home is located, which could bring administrative headaches. Depending on the tax rules of the particular country, you may be able to earn a certain level of income before paying tax, and to subtract expenses such as estate agents’ fees, interest and insurance or other service charges. You should also check whether the property insurance covers letting or if a dedicated policy is necessary.

Opportunities for capital appreciation

If you buy thoughtfully in the right area and the right country, you may be able to make a profit when you come to sell the property, although predicting property price trends years into the future is a fool’s game. In most countries, second homes will be subject to capital taxes. In Luxembourg, the taxable gain depends on how long you have owned the property.

If the sale takes place within two years of buying the property, the gain will be taxed as part of your income, but you will pay a reduced rate if you’ve held it longer. Currency might also be a factor in capital gains calculations. Overall, the issue is liable to be complex and may justify employing the services of a professional.

There are sound financial reasons for buying a second home, from the potential for rental income to the diversification of your personal property portfolio. As well as offering the romance of a bolthole and perhaps a retirement idyll, it can help boost your financial security, as long as you understand the pitfalls and do the financial homework first.

Mortgage loan terms for second homes may be more complicated than for a principal residence, and owners might consider whether to raise borrowing secured against their main home rather than financing the second home directly.