In 2020 with the pandemic disrupting most foreign travel, many of us rediscovered the delights of a UK holiday.
Two years on and the appetite for staycations across coastal, countryside and city locations shows no sign of slowing. In fact, it has prompted a boom in the holiday let market as investors seek to capitalise on this emerging opportunity.
It is still very much a niche market so it pays to ask a few questions before embarking on a holiday let business venture.
Before you embark on this endeavour, here are a few pointers to ensure you are informed and equipped for what lies ahead.
What is a holiday let?
A holiday let is a property available for short-term rental for a certain number of days each year and for personal use at other times.
To be classified as a holiday let it must meet the following criteria:
- the property must be furnished and available to let for at least 210 days (30 weeks) a year
- the maximum length of time for any single holiday can be no more than 31 days
- the property must be commercially let for at least 105 days a year.
Will I need a specialist holiday let mortgage?
Yes, a holiday let mortgage is designed specifically for a short-term rental property with provision for the owner to stay at the property some of the time. A buy-to-let mortgage, on the other hand, is designed for longer term lettings.
As a seasonal business, where income may be irregular and limited to peak times of the year, a holiday let poses more of a risk to the lender.
As a result, rates and deposits tend to be higher – a deposit of 25% to 30% of the total property value is usually required compared to 5% to 10% for a standard residential mortgage.
Where can I get a holiday let mortgage?
Holiday let mortgages are not readily available on the high street. Instead, you’ll find those willing to lend tend to be smaller building societies or holiday let specialists accessed through a mortgage broker.
We advise that you speak to an independent mortgage broker so you can benefit from a professional overview of holiday let mortgages across the whole market.
What will lenders be looking for when they assess a holiday let mortgage application?
Each lender will have different criteria, but typically most are looking for the following boxes to be ticked for an applicant to be successful:
– Minimum income – expected to be between £20,000 and £40,000
– Minimum and maximum mortgage amounts – ranging from £25,000 to £750,000
– Loan-to-value (LTV) ratio – tends to be set at a maximum of 70%, sometimes 75%
– Projected rental income – usually expected to be a gross (pre-tax) rental income of between 125% and 145% of the monthly mortgage repayments when calculated at a 5.5% interest rate (this may of course change as interest rates rise)
– Age and experience –minimum age of 21 and an existing homeowner
– Usage – the property can’t be a main residence
– Portfolio limit – some lenders have a maximum number of holiday lets they are comfortable with one person or company owning
What factors should I consider when buying my holiday let?
Location
Choosing a popular location is one of the most important factors in the success of a holiday let business.
Take time to research aspects such as local market conditions, likely income a property could generate, customer demand in the area, competition and different property types available.
Property
What features will you offer holidaymakers? For example, Wi-Fi and pet-friendly accommodation will be high on the list and extras such as hot tubs and open fires are also growing in popularity.
Meanwhile, think about sustainability – some properties have eco-friendly elements such as electric vehicle charging points, solar panels and heat pumps installed.
Costs
In addition to the upfront and ongoing mortgage payments, it’s important to factor other costs into your calculations such as maintenance, council tax, utilities, insurance, cleaners, gardeners, etc.
Are there any tax advantages in renting out holiday lets?
The main tax advantage for holiday lets is that you can still deduct mortgage interest payments from rental income, reducing your profits and therefore your tax bill.
Landlords are also eligible for allowances for furniture and fittings – and if your business makes a loss, you can offset it against profits in future years. We recommend speaking to a tax adviser or accountant to understand your individual position.
Are holiday lets a good investment?
In popular areas, a holiday let will generate higher rent than a standard long term rental property and there is potential to achieve a healthy second income with the right location, property and level of demand.
Analysis by Sykes Holiday Cottages showed in just two years, average income for property owners went up by 33%.
The most popular regions this summer were North Wales, Cornwall, Cumbria and the Lake District, Devon and the North Yorkshire Moors and coast.
However, as with any investment opportunities, it’s important to seek professional advice to ensure it makes financial sense for your own specific circumstances. Time spent getting it right now will pay dividends later.
Vincent Burch is mortgage director at Vincent Burch Mortgage Services, which has access to all specialist lenders offering holiday let mortgages
