Holiday let mortgages for holiday homes

If you plan to buy a holiday home to let out to guests, or own one already and want to start letting it out, then you need to make sure you have the right mortgage.

Here’s our guide to getting the right holiday home finance.

What types of mortgages are available when buying a holiday home?

If you’re buying a holiday home, the type of mortgage you need will depend on how you want to use the property.

If the property will be used exclusively as your own holiday home (meaning you can also allow friends to stay there free of charge), then you will need a straightforward residential second home mortgage.

However, if you plan to let out your holiday home on a regular basis to generate income, then you will need a special holiday let mortgage – or at the very least, special permission from your mortgage lender (which will usually only be short term).

Here you can find out more about holiday let mortgages.

What is a holiday let mortgage?

A holiday let mortgage is a special type of buy to let mortgage for buying a property that will be let only for certain periods of the year, rather than on an ongoing basis.

If you want to buy a holiday home for yourself but also let it out when you’re not using it, this is the kind of mortgage you’ll need.

The key difference is due to the fact that a holiday let is a seasonal business, unlike a standard rental property.

Holiday lets tend to make most of their money during the warmer months of the year, and might be largely unused at other times.

This makes such properties more of a risk for a mortgage lender, so the criteria will be much stricter.

How does a holiday let mortgage work?

As with any mortgage, the lender wants to make sure you can afford the monthly repayments and will be able to keep paying them in a range of different circumstances.

In your mortgage application, your lender will look at your income and your other spending commitments (e.g. other mortgages, loans and debts that must be serviced) to work out whether you can afford the new mortgage.

When assessing your income, the lender will consider the income you are likely to make from the holiday let itself.

However, they will also want to verify that you could continue to pay your mortgage on the property even if you failed to get any guests for a period of time.

If you can demonstrate that you’d still have enough spare income to pay the mortgage while the property is unoccupied, you stand a much better chance of having your mortgage approved.

What are the lending criteria for holiday let mortgages?

For most holiday let mortgages, you will need to meet the following criteria:

• A deposit of at least 25% of the property’s value, perhaps even as high as 40%.
• Rental income of typically 125% to 145% of the interest payable on the mortgage.
• A minimum income of between £20,000 and £40,000 in addition to any rental income.
• Usually, you must already be a homeowner.

Here’s an example of how it works:

You have your eye on a cottage on the Dorset coast. The property is on the market for £250,000, so you will need a deposit of at least £62,500. If your repayment holiday let mortgage rate is 4.5% for 25 years, this means you will have to generate an annual income of around £15,500 a year.

Holiday let mortgages are growing in popularity, but are still something of a niche product.

This may limit the deals available to you. You may have more options if you own several properties already (e.g. other holiday lets or ordinary buy-to-lets), as you could use these other properties as collateral on the loan.

Either way, a mortgage broker can improve your chances of finding the right deal.

Use our Mortgage Calculator to find out how much you could borrow, how much it might cost a month and what your loan to value ratio would be.

What are the tax implications of a holiday let?

Your investment in a holiday let can have considerable tax implications.

For example, when you sell your property, you may have to pay capital gains tax (CGT) on any increase in its value during your ownership. You will also need to pay tax on your rental income.

While owners of furnished holiday lets have been able to benefit from certain reliefs, these are being scaled back.

For example, owners of holiday lets are currently entitled to CGT relief, including business asset rollover relief, business asset disposal relief and gift holdover relief. However, these will all be withdrawn from April 2025.

At the same time, mortgage interest relief will also change. Currently, mortgage interest can be deducted from rental income for income tax purposes. However, from April 2025, owners will instead get a 20% tax credit, reducing the rate of relief for higher and additional rate taxpayers.

When you buy your holiday let, you also need to be aware of stamp duty. On top of the standard stamp duty land tax (SDLT) charge applied to all property purchases, you will be liable for a surcharge when you buy a second property. This was increased from 3% to 5% in the Autumn Budget 2024 with immediate effect.

Find out about the second property stamp duty bands.

What are the costs associated with a holiday let mortgage?

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The interest rate on a holiday let mortgage will typically be higher than on a residential mortgage. There are also additional costs involved in owning and running a holiday let, and these are often more substantial than people think.

You will need to pay insurance, utility bills and Council Tax (or overseas equivalent if buying abroad). Also factor in the costs of any maintenance or renovations that are needed.

A key question is how you will manage the property. The holiday home will need to be cleaned and prepared for each new arrival, and you may need to pay someone to do this for you.

What about holiday let mortgages for overseas property?

If you’re buying abroad, your approach will have to be slightly different.

Generally you will have to approach the bigger banks that have branches in the country you’ve chosen, although your mortgage broker may have access to further lending options.

One such option is to go with a local bank from the area where your target property is located. This opens you up to the fluctuations of the foreign currency exchange market, so you may see your mortgage terms and rates shift fairly frequently.

Be extra cautious when conducting any big financial transactions abroad, as even if you speak the language like a native, you may not be sufficiently familiar with all their legal quirks and tax practices.

A financial adviser based in the region will be an enormous help.

What are the best holiday let mortgage deals?

Look for a mortgage adviser who knows both the buy-to-let market and the holiday let market well.

Not only will they be able to find you the best available deal, but they may be able to give you other tips on the practical side of setting up in this business.

What are the alternatives to a holiday let mortgage?

The obvious alternative to a mortgage is a cash purchase. If you happen to have this much money available, buying a property outright is always going to be better value.

You won’t pay any loan interest or arrangement fees, and you’ll get to keep more of your rental income.

Alternatively, if you’re not letting a whole property but only a room or annex in your home, you won’t need a specialist holiday let mortgage – though you should still consult your current mortgage lender first.

Get expert financial advice

Securing a mortgage for a holiday home to let can seem complex, but understanding the unique aspects of these loans makes the process much smoother.

With requirements like higher deposits and proof of potential rental income, it’s essential to grasp these specifics, along with the related costs and tax implications.

By staying informed and carefully considering your options, you can confidently find the right mortgage that aligns with your goals for your holiday property.

Unbiased will match you with a qualified mortgage broker who can help you navigate the specifics of securing a holiday let mortgage and find the best options for your property.