Guide To Holiday Let Mortgages
Written By Zac Harrison
Are you considering investing in a holiday let property? With the demands for vacation rentals on the rise, it’s no wonder more and more people are looking into holiday let mortgages.
But navigating the world of property financing can be overwhelming, especially if you’re new to the game.
Our expert team of holiday let professionals has carefully curated this guide to help you make informed decisions and maximise the return on your investment.
We explore the pros and cons of holiday let mortgages, provide practical tips on property selection, and discuss the potential financial benefits.
So, if you’re ready to explore the world of holiday let mortgages and discover how to turn your investment into a profitable venture, keep reading. Let’s unlock the potential of holiday home ownership together.
What is a holiday let mortgage ?
A holiday let mortgage is a specialised type of mortgage designed for individuals who want to purchase a property for the purpose of renting it out as a vacation rental.
Unlike traditional residential mortgages, holiday let mortgages come with their own set of unique features and requirements.
What are holiday let mortgages for ?
These mortgages are specifically tailored to accommodate the unique needs of holiday let properties, which often experience fluctuations in occupancy and rental income.
Unlike standard buy-to-let mortgages, holiday let mortgages typically have higher loan-to-value (LTV) ratios, allowing investors to borrow a larger percentage of the property’s value. This can be particularly beneficial for first-time investors or those with limited capital to put down as a deposit.
Benefits of a holiday let mortgage
Another key distinction of holiday let mortgages is the lender’s focus on the property’s potential rental income, rather than just the borrower’s personal income.
Lenders will assess the expected rental yield of the property, considering factors such as location, demand, and seasonality, to determine the mortgage amount and terms. This allows investors to leverage the property’s earning potential to secure financing, even if their personal income may not be as high as required for a standard buy-to-let mortgage.
How to buy a holiday let
Purchasing a holiday let property involves a slightly different process compared to a standard residential property acquisition. Here are the key steps to consider when buying a holiday let:
Research the market: Thoroughly research the holiday let market in your desired location, analysing factors such as demand, occupancy rates, and average rental yields. This will help you identify the most promising areas for investment and ensure that the property you purchase has the potential to generate a good return.
Secure financing: As mentioned earlier, holiday let mortgages are the preferred financing option for this type of investment. Speak with lenders who specialise in holiday let mortgages and compare their rates, terms, and eligibility requirements. Be prepared to provide detailed information about the property, its rental potential, and your experience.
Find the right property: Once you have a solid understanding of the market and have secured financing, start your property search. Look for properties that are well-suited for holiday letting, considering factors such as location, amenities, and accessibility. Pay close attention to the property’s condition and any potential renovation or maintenance costs that may be required.
Develop a rental strategy: Develop a comprehensive rental strategy that includes pricing, marketing, and property management. Consider using professional vacation rental management services to handle the day-to-day operations of your holiday let, ensuring that it is well-maintained and effectively marketed to potential guests.
Manage the property effectively: Ongoing property management is crucial for the success of a holiday let. This includes maintaining the property, responding to guest inquiries, handling bookings, and ensuring compliance with relevant regulations. Regularly review and adjust your rental strategy to optimise occupancy and revenue.
For your property purchase to be considered a holiday let by a lender, it’ll need to meet the following criteria:
The property must be available for at least 210 days a year.
It must be let out for at least 105 days a year.
Each rental must be no longer than 31 days.
Any stay longer than 31 days doesn’t count towards the annual total.
Renting to friends or relatives for free or at reduced rates doesn’t count towards the annual total.
Getting a holiday let mortgage can be complex and this article is intended as a guide only. Please get advice from a banking and finance expert if you’re not sure of anything.
Holiday let mortgages criteria explained
The short-term and seasonal nature of holiday lets means that there’s increased risk for mortgage lenders. As a result, the criteria borrowers need to meet is different.
Overview
it’s likely the lender will only give you a holiday let mortgage if you already own your own property
you’ll usually need a deposit of at least 25 per cent
the maximum Loan to Value (LTV) for a holiday let mortgage is usually 75 per cent
the maximum loan amount from a holiday let lender is usually between £1 million and £1.5 million
you can’t use a holiday home as your main residence (although you can stay there for a limited time throughout the year)
most lenders require a minimum personal income of around £25,000 a year or £30,000 for joint applicants
When you apply for a holiday let mortgage, you’ll also be expected to provide an estimate of the rental income you’ll generate.
Most lenders will only give you a mortgage if you can prove you’ll be able to make between 125 per cent and 145 per cent of the monthly mortgage repayments (before tax) at an interest rate of 5.5 per cent.
Example
You buy a holiday let for £300,000 with a 25 per cent deposit of £75,000.
With an interest rate of 5.5 per cent, the monthly repayments on an interest only mortgage would be £1,031.
To get a mortgage, most lenders would require you to generate a minimum of £1,500 rental income a month (£18,000 a year), which is 145 per cent of the monthly repayment.
Holiday Let mortgage calculator
This holiday let mortgages calculator from Holiday Cottage Mortgages can give you an idea of how much rental income you need to generate, plus what your monthly repayments could be.
Are holiday let mortgages interest only ?
Holiday let mortgages can be structured as either interest-only or repayment (capital and interest) mortgages, depending on the lender and the borrower’s preferences as well as your personal choice.
Interest-only holiday let mortgages:
With an interest-only mortgage, the borrower only pays the interest on the loan, and the principal amount remains unchanged throughout the mortgage term.
This can be beneficial for holiday let investors, as it allows them to keep their monthly mortgage payments lower, freeing up more cash flow to reinvest in the property or cover other expenses.
Interest-only mortgages are often favored by investors who plan to sell the property at the end of the mortgage term or who expect the property’s value to appreciate significantly over time.
However, it’s important to note that the borrower will still need to repay the full principal amount at the end of the mortgage term, which may require refinancing or the sale of the property.
Repayment (capital and interest) holiday let mortgages:
With a repayment mortgage, the borrower pays both the interest and a portion of the principal each month.
This ensures that the loan is fully repaid by the end of the mortgage term, and the borrower owns the property outright.
Repayment mortgages can provide a more straightforward and predictable payment structure, which may be preferred by some holiday let investors.
The higher monthly payments, however, can impact the property’s cash flow and the investor’s ability to reinvest in the property or cover other expenses.
Should you go interest only or capital & interest ?
We at Stayful would advise an interest only basis, although you are never paying down the principle loan, your gross profit will be much higher and your loan to value ratio will increase over time as the property goes up in value.
Holiday let mortgage rates & how to get the best deal
Due to the short-term nature of holiday lettings, mortgages for these types of properties can be more expensive.However, there are several tax benefits that you don’t get with buy-to-let investment that can boost your returns.
Getting the best holiday home mortgage deal is a similar process to finding a residential or buy-to-let mortgage.You’ll need to shop around for the best interest rate and think carefully about whether you want a fixed or variable rate mortgage.
It’s important to remember the higher your deposit, the lower your repayments and interest rate are likely to be.
Holiday Let Mortgage providers
Rates for holiday let mortgages tend to sit between 2% – 4%. A mixture of high street banks and smaller building societies offer holiday let mortgages. Here are some of the best known providers:
Ipswich Building Society
Furness Building Society
Teachers Building Society
Hodge Bank
Leeds Building Society
You’ll also need to keep an eye on rising interest rates and inflation as this could affect your affordability in the future.
Mortgages for holiday lets & what are the tax advantages ?
If you decide to buy a holiday let, there are some tax benefits that can increase your return on investment.Unlike buy-to-let landlords, owners of holiday lets can deduct mortgage interest payments from their rental income. This means their profit is reduced, so they can pay a lower tax bill.
Buy-to-let mortgage interest tax relief for traditional landlords was restricted between 2017 and 2020. Landlords with a buy-to-let mortgage now only get a tax credit at the basic rate of income tax (20 per cent).
Some of the other tax benefits of buying a holiday let with a mortgage include:
you can claim capital gains tax relief if you sell the property in the future
if your holiday let business makes a loss, you can offset it against future profits to pay less tax
you can claim allowances for furniture and fittings in your holiday home (unlike buy-to-let landlords)
It’s important to note that if your holiday home is your second property, you’ll need to pay a 3% stamp duty surcharge.
Can you holiday let on a residential mortgage ?
In general, it is not possible to use a standard residential mortgage to finance a property that will be used as a holiday let. Residential mortgages are designed for owner-occupied properties, and lenders typically prohibit the use of these mortgages for investment properties, including holiday lets.
There are a few key reasons why a residential mortgage is not suitable for a holiday let:
Rental income: Residential mortgages are based on the borrower’s personal income, not the potential rental income from the property. Lenders for holiday let mortgages, on the other hand, will assess the expected rental yield and use this as a key factor in determining the mortgage amount and terms.
Property usage: Holiday let properties are typically used more intensively than a standard residential property, with higher occupancy rates and more wear and tear. Lenders for holiday let mortgages understand and account for these factors, whereas a residential mortgage may not provide the necessary coverage.
If you attempt to use a residential mortgage for a holiday let, you may face issues with the lender, such as the mortgage being recalled or the lender refusing to provide further financing in the future. It’s important to be upfront with the lender about the intended use of the property and to seek a specialised holiday let mortgage to ensure compliance and access to the most suitable financing options.
Are holiday lets commercial property ?
The question of whether holiday lets are considered “commercial property” or “residential property” is not a straightforward one, as the classification can vary depending on the specific circumstances and the relevant laws and regulations.
In general, holiday lets are often treated as a form of residential property, rather than commercial property, for the main reason of the property could still be used as a residential dwelling.
Is holiday let income pensionable ?
In general, income from a holiday let property can be considered as a form of self-employment or business income, rather than just rental income.
This means that the holiday let owner may be able to contribute a portion of their holiday let earnings to their pension, potentially benefiting from tax-advantaged retirement savings, especially if your holiday is set up in a Ltd company and setup a SIP pension.
Here are some key considerations regarding the pensionability of holiday let income:
Pension contribution eligibility: In many countries, self-employed individuals or business owners are eligible to make contributions to personal pension schemes, such as a self-invested personal pension (SIPP) or a private pension plan. The holiday let income may be considered as qualifying earnings for the purpose of these pension contributions.
Tax treatment of pension contributions: Pension contributions made from holiday let income may be eligible for tax relief, depending on the applicable tax laws. This can help to reduce the overall tax burden and maximise the long-term growth of the pension savings.
Creating a situation like this is possible but it is best to speak to an accountant about this for tax and pension advice.
Where are the UK’s holiday home hotspots?
So you’ve decided to buy a holiday let, but where in the UK can you get the best returns? we have created a free holiday let income calculator so that you can estimate your potential income, below are 10 locations that we at Stayful find perform well for holiday letting.
Locations
Peak District.
Lake District.
Robin Hoods Bay.
York.
Harrogate.
Brighton.
Blackpool.
Bournemouth.
Plymouth.
Rutland.
If you are interested in hassle free holiday let management for your holiday let property, get in touch and we can provide expertise on income, occupancy & make your investment hands off.
