My finances, my projects, my life
June 25, 2022

The financial costs and opportunities of a second home

  Compiled by myLIFE team myHOME February 22, 2022 49

Most people do not buy a second home to make money, but because it offers an alternative life in a place they love. However, the romance of a second home shouldn’t cloud your financial judgement. With good planning, it may even be possible to make money while having the perfect bolthole to escape from 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.

In France, for example, the notary’s fee is usually 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 incentives to boost the housing stock through lower taxation. 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 a currency shock.

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 offer 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 main residence, and owners might consider whether to raise borrowing secured against their main residence 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 involving 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 another currency. At the moment, rates are lower for euro mortgages than almost anywhere else in the world, although this could change in the future.

In general, it is good practice not to have significant outgoings in a different currency from your income, which could incur exchange rate risks – as borrowers in other countries who took our Swiss franc home loans before the 2007-09 financial crisis discovered. However, if you are expecting to receive rental income from your second home, it may make sense if the rent and the loan payments are in the same currency.

Another consideration is whether you may need a will in the country where you have your second home. People who do not are liable to find 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 financial drain 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 a problem.

Those 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 any basic maintenance. This has been a problem for many second homeowners during the Covid-19 pandemic.

The cost of furnishing a second home should also be borne in mind. 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 explosion of online rental websites has provided ever more options for those wanting to rent out second homes.

Making a second home pay for itself

The explosion of online rental websites such as Airbnb has provided ever more options for those wanting to rent out second homes, although fees will eat into the rental 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 bring you into the tax net of the country where the second home is located, which could bring administrative headaches. Depending on the tax rules of that country, you may be able to earn a certain level of income before paying tax, and to subtract expenses such as estate agent fees, interest and insurance charges. You should also check whether your insurance covers letting or whether a dedicated policy is necessary.

Opportunities for capital appreciation

If you buy thoughtfully in the right area, you may be able to make a gain when you come to sell the property. In most countries, second homes will be subject to capital taxes. In Luxembourg, the gain will depend 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. On the whole, it is likely to be complex and 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 to provide financial security, as long as you understand the pitfalls and do the financial homework first.