In recent years there has been an increase in people buying holiday homes as businesses in coastal and holiday hotspots around the UK. This route has been of interest to investors as holiday-lets potentially provide a higher rental return than residential buy-to-let properties, have some tax advantages and the owners can also use them for their own holiday accommodation.
How does a holiday-let mortgage work?
If you want to buy a home that you can rent out on a temporary basis throughout the year and cannot fund the entire purchase price of the property from your own funds, you’re likely to need a holiday-let mortgage.
These mortgages are available as interest-only or on a standard repayment basis.
The key difference between a buy-to-let mortgage and a holiday-let mortgage can be found in the way that lenders calculate what they will lend applicants seeking to buy a holiday home.
For a residential buy-to-let purchase the main way that most lenders calculate what they will lend is based on the monthly expected rental income that will be paid by the tenant. When calculating what they will lend to people buying holiday-let properties, the main consideration for lenders is what income the property will generate on a seasonal basis. Most lenders will require an estimate from a letting agent for what income they would expect the property to generate in high, mid and low season. Each lender has a calculation that they use to establish what they will lend based on these seasonal estimates.
What are the tax implications of a holiday-let?
You should consult a qualified accountant in order to discuss the tax implications that will arise if you purchase a holiday-let. One tax advantage, however, of owning a holiday let (if you have a mortgage) is that there is no limit on the amount of mortgage interest that you can offset against your profit. This is something that no longer applies to properties purchases as residential buy-to-let investments.
Holiday-let mortgage criteria
There are fewer lenders willing to offer holiday-let mortgages.
Each lender will have different rules, but here are the main criteria that they will take into account when deciding to lend to holiday-let applicants:
- Income: Lenders usually require that you have a minimum income independent of income that will be generated from the holiday let property.
- Minimum and maximum mortgage amounts: Each lender will have a minimum and maximum amount that they are prepared to lend on a holiday let basis.
- Deposit: You will need a deposit to secure a holiday-let mortgage. Most lenders require that you have a need a minimum deposit of 25% to purchase a holiday-let property.
- Personal situation: Most lenders require that you already own your own home and are 21 years of age or older.
- Main residence: Holiday-let mortgages can’t be for a main residence.
- Portfolio limit: Some lenders will set limits on the number of holiday-lets that you can own.
The above list or criteria is subject to change, not exhaustive and varies from lender to lender. If you are interested in purchasing a holiday-let property we suggest that you get in touch with us and one of our advisors will be very happy to discuss your options and next steps with you.
