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.
Buying a holiday home – the two kinds of mortgage
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 30% of the property’s value, perhaps even 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 beautiful cottage on the Dorset coast. The property is on the market for £250,000 so you will need a deposit of at least £75,000. If your holiday let mortgage rate is 4.5%, this means you will have to generate an annual income of at least £11,000 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.
What are the tax implications of a holiday let?
Your investment in a holiday let can have considerable tax implications, especially when compared to a regular buy to let property.
There are upsides and downsides. On the positive side, you may be entitled to:
- Capital gains tax relief for businesses, such as business asset rollover relief and entrepreneurs’ relief
- Capital allowances for furniture, equipment, and fixtures
- Offset the full amount of mortgage interest against the rental income when calculating profits
However, on the negative side, you 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 at least an extra 3% on a second property, and probably more (the additional stamp duty increases in bands, in line with the property’s value).
What are the costs associated with a holiday let mortgage?
The interest rate on a holiday let mortgage will typically be higher than on a residential mortgage.
However, you will be able to offset your mortgage interest payments against your rental income when calculating your taxes, which should mitigate this extra cost to some extent.
There are additional costs involved in owning and running a holiday let, and these are often more substantial than people think.
You will need to get on top of your 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 not be based close enough to do this yourself.
In this case you will probably need to hire a third party to perform these duties, which is an additional cost.
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.
Be aware that this opens you up to the fluctuations of the foreign currency exchange market, so could 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.
An independent adviser based in the region will be an enormous help.
Where can I get a good holiday let mortgage deal?
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 do happen to have this much money available, then buying a property outright is always going to be better value.
You won’t pay any loan interest or arrangement fees, and every penny of rental income (after tax) is yours.
However, if you’re not letting a whole property but only a room or annex in your home, then you won’t need a special type of mortgage – though you should still seek your mortgage lender’s permission to do this.