Second homes can be extremely profitable investments indeed. From providing a refuge from the stresses of everyday life to bringing in a substantial income from short-term letting, there are many advantages to owning a second home and they can easily end up paying for themselves. However, few of us can afford to buy a second property outright. Instead, many second homebuyers must navigate the tricky world of holiday let mortgages. If you are interested in buying a second home and will require a loan, read on as we explain exactly how a holiday let mortgage works…
What is a holiday let mortgage?
First, you may have heard the terms holiday home mortgage and Buy to Let mortgage banded around before in the property industry. Please note, however, that these mortgage plans only apply to second homes you wish to use privately or intend to rent on a long-term basis. For any second home you wish to rent short-term as a holiday home, you will need to apply for a holiday let mortgage.
Can I still use my holiday let myself?
For a property to count as a holiday let, rather than a buy-to-let, it must be available for letting as furnished holiday accommodation for at least 210 days per year. Holiday let owners, therefore, have plenty of time to enjoy the use of their holiday home as they wish.
What is a furnished holiday let?
Furnished holiday lets are any property rented out as a holiday home on a short-term basis. They have certain tax benefits, but to qualify, they must meet the following criteria:
- Be let out for 105 days per year and available for at least 210 days per year
- Be a short-term home i.e. not rented out for longer than 31 days at a time
Furnished holiday lets also receive allowances for furniture and fittings and capital gains tax relief in the event the property is sold.
Am I eligible for a holiday let mortgage?
Several general factors will determine your eligibility, although these vary from provider to provider:
- Personal income and current outgoings
- Other mortgages and their size
- Provision of a 25%-30% deposit
- Proof that the buyer can cover mortgage payments during periods when the property is not rented out
- Buyers must be over the age of 21 and own their own home
- Holiday let cannot be used as the main residence or previously used as the main residence
How much money can I get for a holiday let mortgage?
Again, this figure will vary, but most mortgages are determined by an income projection figure that considers the income fluctuation that comes with short-term letting.
Lenders will consider the type of property, location, access, transport links, size and condition of the property, and the number of bedrooms. For example, a property within a holiday park is limited in its use as it can only be rented as a holiday home. This may reduce the amount of money offered to the potential buyer.
Lenders will also make projections based on the property’s ability to provide a rental income of around 125%-145% of the interest payable on the mortgage.
Are there any tax benefits?
The government classes furnished holiday lets as a business; all expenses can be deducted from your rental income before tax.
What is the interest rate on holiday let mortgages?
Interest rates currently stand at 2%-4% depending on deposit size but remember your mortgage payments can be offset by rental income for tax purposes. This is a booming market, as more and more UK holidaymakers are choosing to holiday in Britain and therefore subject to change.
Is a holiday let mortgage more expensive?
Yes, holiday let mortgage rates are typically slightly higher than residential or buy-to-let mortgages, which require deposits of only 5%-10%.
This is because there fewer mortgage providers that cater to this industry. Short letting is an incredibly seasonal business and often accompanied by steep rental fluctuations, which are deemed a risk by lenders.
So, are holiday let mortgages worth it?
In short, yes! Since before the pandemic, UK staycations have been steadily rising in popularity and reached record-breaking heights in 2020, with no sign of slowing down. The short-letting market is steadily becoming a lucrative industry for UK second homeowners and digital nomads. Hosts now have various management options with industry-leading brands like Pass the Keys, who remove the hassle of short letting with their bespoke end-to-end management.
