An increasing number of people are considering buying holiday homes in popular coastal and tourist holiday hotspots around the UK. Holiday Lets provide a decent second income and are great in terms of special tax advantages.
Holiday Lets do however, come with their limitations. It’s worth knowing the ins and outs of holiday let mortgages before committing to one to make sure that they are right for you.
We’ve created a complete guide, answering all of your holiday let mortgage questions.
What is a holiday let mortgage?
A holiday let mortgage is designed for people looking to borrow money to buy a property that will be let out on a short-term basis to tourists as a business.
It is slightly different from a holiday home mortgage, as this entails borrowing money to buy a second home that only you will use.
What’s the difference between a holiday let mortgage and a buy-to-let-mortgage?
A holiday let mortgage is essentially very similar to a buy-to-let mortgage; however, a buy-to-let mortgage is a commercial type of mortgage designed for a short-term tenancy, typically for about 12 months.
A holiday-let mortgage is designed for people to own a property for commercial reasons, but allow others to borrow the property as a guest for much shorter periods of time, normally a matter of days or weeks, rather than a contracted tenant.
You can learn more about buy-to-let mortgages in our dedicated guide.
How does a holiday let mortgage work?
As with any mortgage, your lender will make sure that you can afford the monthly repayments and that you can continue paying them under a range of different circumstances.
In the mortgage application, your lender will look at your income and your committed outgoings to work out whether you can afford a new mortgage.
When assessing your income, the lender will consider whether or not you are likely to make a profit from the holiday let itself. They will also want to consider if you will be able to continue to pay the mortgage on the property if you fail to secure any guests for a certain period of time.
If you can demonstrate that you’d still be able to pay the mortgage while the property is unoccupied, you will stand a much greater chance of having your mortgage approved.
How is affordability worked out on holiday lets?
Most lenders in this market will work on an average of the high, medium & low season rental amounts you would receive. They will then typically assume that the property would be rented for around 30 weeks per year.
This figure is then used to calculate the maximum loan amount available for that property.
Does a holiday let property need to be furnished for a mortgage?
Yes, if you’re looking for a mortgage on a holiday let business, most lenders will require a fully furnished property.
Can I get a mortgage for more than one holiday let?
Some mortgage lenders will limit the number of holiday let homes you can have, which potentially means you will only be able to have one.
However, if you can prove to the lender that you can afford multiple holiday let homes they may be more flexible and allow you to have multiple mortgages.
What mortgage do I need for a holiday let?
If you are going to need to borrow money for your holiday home business, you will need a specialist mortgage. Traditional residential mortgages do not allow you to let out your home.
A buy-to-let mortgage may not be suitable as it doesn’t consider the number of days that you would be letting out; it will only consider the months. This is because a buy-to-let mortgage is a more permanent structure whereby you have a tenant, rather than a one-time, paying holiday ‘guest’.
A holiday-let income will fluctuate as in peak months - it could be considerably higher than a buy-to-let income, but it isn’t guaranteed for months (or years) at a time. The amount a lender will loan you with a holiday let mortgage is based on income projection figures, rather than calculating multiple, potential rental incomes.
How to get a holiday let mortgage
Holiday let mortgages are a more niche mortgage topic, so it is advisable to work with professional mortgage experts who understand how the market works.
At Go2Mortgage, we can help you find your best options for a holiday let mortgage and will help you to understand the holiday let forecasts.
You can aim to secure a holiday let mortgage yourself, though it can be a tricky process. Unless you have the experience and knowledge of handling complex mortgage issues, then you may risk derailing in the process and losing your best opportunities.
Holiday let mortgage brokers
Here at Go2Mortgage, our holiday let mortgage brokers will aim to provide you with the best mortgage prices and offer financial advice to ensure that you are spending your money wisely, whilst still bringing in a profit in return.
Regardless of how you let out the home, experienced holiday let brokers will be able to give you all the advice you need on securing a mortgage for a holiday home property.
Holiday let mortgage criteria
With a reduced number of lenders willing to offer holiday-let mortgages, it can be difficult to narrow down the lending criteria for being accepted.
Some of the main points to securing a holiday let mortgage that you may want to consider are:
Minimum Income: Lenders often set a minimum income requirement - this is often between £20,000 and £40,000 per annum.
Portfolio Limit: Some lenders may set limits on the number of holiday lets they will allow you to own and rent out at one time.
Personal Portfolio: For a holiday-let mortgage, some lenders will require specific criteria to be met. These can be that you: own your own home, are aged 21 or above and have a UK citizenship with at least 3 years of address history.
How much deposit will I need for a holiday let mortgage?
In order to get a holiday let mortgage, you will likely need to provide at least a 25% deposit.
This is slightly larger than some buy to let mortgages due to the fact the lender needs to examine the risk associated with short-term letting. This is largely due to the seasonality of rental income streams.
Holiday let interest-only mortgages
You could access interest-only holiday let mortgages - these mortgages are arranged in the same way as standard buy to let mortgages are.
This means that they can be interest-only or capital-plus interest payments, or a mix of the two. However, if your mortgage is on an interest-only basis, you will need to have an adequate repayment plan for the loan in place.
What are the tax benefits of a holiday let mortgage?
The main advantage of a holiday let mortgage is that you can still deduct mortgage interest payments from your rental income to reduce your profits and therefore, your tax bill.
If you rent out furnished holiday accommodation, the HMRC states that you can claim capital gains tax relief for traders. This includes entrepreneurs relief when you sell the assets.
Owners are also eligible for allowances for furniture, equipment, fixtures and fittings. If your business makes a loss, you can offset it against profits in future years to pay less tax.
FAQs about holiday let mortgages
Are holiday let mortgages more expensive?
Holiday let mortgages generally require a larger upfront cost than typical residential mortgages, and the deposit normally sits at about 25-30% of the value of the property.
Interest rates are also slightly higher due to it being a niche finance product with limited providers on the market.
It also tends to be used on seasonal properties, meaning that income may be irregular and limited to peak times of the year, which poses a greater risk to the lender.
Can I get a holiday let using a normal mortgage?
No, holiday homes for rent cannot be purchased with a normal residential mortgage. You must have a holiday let mortgage, or a buy to let mortgage in rare cases.
How is buying a holiday let property different to buying a residential buy-to-let?
The main difference is that a holiday let mortgage is for seasonal businesses, unlike a standard residential buy to let which is all year round. A holiday let property is solely commercial, unlike a residential buy-to-let.
Due to this, a holiday let mortgage will also require larger deposits due to the limited providers on the market and the risk that lenders face.
Can I use the property as my own holiday home?
Yes, you can absolutely use your own holiday home for yourself, friends and family, but there are a few limits set out by the HMRC which you need to be mindful of.
Availability: Your property must be available for letting as furnished holiday accommodation for at least 210 days in the year. Any days that you spend in the property do not count as available.
Pattern of occupation: If you want to use the property as a second home for a significant period of time throughout the year, you need to be mindful. If the total lettings exceed 31 continuous days for more than 155 days during the year, your property won't meet the HMRC conditions.
Letting: You must actually let the property out commercially as furnished holiday accommodation to the public for at least 105 days of the year. Essentially, half of your ‘available’ days must be booked and used in order to stay compliant with HMRC. Within these 105 days, you must not count days when you let the property to friends or family for free, or at a reduced cost.
Can I get a holiday let mortgage for my AirBnB property?
There are a limited number of lenders that will allow AirBnB rentals, but this is even more niche than a normal holiday rental. It is likely that more lenders will move into this market as it becomes even more popular.
Can I get a holiday let mortgage for an overseas property?
No, you cannot use a UK holiday let mortgage product or deal on any overseas properties. It is also very rare that the UK bank will lend against properties in another country, even if they have branches and operate there themselves.
You will likely have to obtain a mortgage from a lender in the country you wish to buy in.
Getting a holiday let mortgage with Go2Mortgage
If you are considering a holiday let mortgage, or have any more questions, feel free to contact us today for expert advice. Our specialist mortgage brokers have plenty of experience in securing holiday-let mortgages, so save yourself the hassle and let our advisors source the best deal for you.
Get in touch today and start finding a mortgage to start your holiday home business.