Holiday let mortgages

If you plan to buy a property with the intention of letting it to holidaymakers on a short-term basis, you’ll need a holiday let mortgage. 

Buying a property in a holiday hotspot, such as by the sea or in a national park, is a dream for many people. 

A holiday let can be a great investment, has tax advantages over a traditional buy-to-let property, and you can spend your own holidays there too.

Read this guide to find out about holiday let mortgages.

What is a holiday let mortgage?

Holiday let mortgages are designed for people buying a property to let out on a short-term basis to holidaymakers, tourists, or Airbnb guests.

This type of mortgage is different from: 

  • a holiday home mortgage (where you buy a second property for your own holidays)

  • a buy-to-let mortgage (where you let a property to long-term tenants)

  • a residential mortgage (where you live in the property as an owner-occupier)

Do I need a specialist mortgage?

If you buy a property with the intention of letting it out to holidaymakers as a business, you will need a specialist holiday let mortgage.  

If you have a normal residential mortgage, your lender won’t let you rent out your home in this way. If you have a buy-to-let mortgage, your lender is likely to stipulate that you can only let to tenants on an assured shorthold tenancy (AST) contract.

What are the holiday let mortgage criteria?

The lending criteria for holiday let mortgages or holiday cottage mortgages will be different to other types of mortgage.

Here are some of the factors a holiday let lender will look at when considering a holiday let mortgage application:

  • where in the UK the property is located

  • the mortgage loan-to-value

  • the minimum and maximum loan size

  • the mortgage term

  • your age

  • whether you and any joint applicants already own a property 

  • the income you estimate you will be able to earn from the property

  • your income from your job or other properties

  • how many days a year you plan to stay in the property yourself

  • rental rates from a local holiday letting agent

  • rental coverage of the mortgage payments

How much will I be able to borrow on a holiday let mortgage?

Most holiday let mortgages require a deposit of at least 30% of the property’s value. This reduces the risk for the lender. 

Lenders will normally require the holiday let to provide a rental income of about 125% to 145% of the interest payable on the mortgage.

So, as a general example, if you wanted to buy a holiday let worth £300,000 you’d need to put down a deposit of at least £90,000. 

Assuming a mortgage amount of £210,000 and an interest rate of 4%, an interest-only mortgage would cost about £700 a month.

So you’d need to be able to generate an annual income of at least £10,500 to £12,180 a year.

If the rental income generated by the property isn’t enough, some lenders will allow you to use your personal income to cover the shortfall – this is known as “top-slicing”.

A holiday let calculator can help you work out how much you can borrow. 

How much can I earn from a holiday let?

The rental income you earn from a holiday let mortgage is likely to fluctuate. You could earn a higher weekly rent in the high season, and a lower rent, or nothing at all, in the low season.

You will probably be able to charge a higher weekly rent than you could on a buy-to-let property, but the income won’t be guaranteed and void periods are more likely. Your costs will be higher too – for example, the property will need to be cleaned between lettings.

So, the amount a lender will lend you on a holiday let mortgage will be based on an estimated annual income figure rather than a multiple of potential rental income.

The lender will also look at your income from your job, or other rental properties, when you are assessed for a holiday let mortgage as it will need to know you can cover the mortgage when the property isn’t occupied.

How do I get a holiday buy to let mortgage?

Only a small number of lenders offer holiday let mortgages as they are considered a specialist type of lending. 

You should speak to a holiday let mortgage broker who can check the market for you. They will know the latest holiday let mortgage criteria, where to find the best holiday let mortgage deal, and will have access to a holiday let mortgage calculator. 

Holiday let mortgages usually come with higher interest rates than mainstream mortgages. You are also likely to need a bigger deposit

Holiday let mortgage providers are mainly building societies and specialist lenders rather than high street lenders.

Lenders that offer holiday let mortgages include:

  • Bath Building Society 

  • Furness Building Society 

  • Leeds Building Society 

  • Monmouthshire Building Society

  • Principality Building Society 

  • The Cumberland

How is a holiday let taxed?

There are tax advantages to investing in a holiday let property instead of a buy-to-let property.

HMRC views a holiday let as a business. This means owners are exempt from the buy-to-let mortgage tax relief changes that came into effect in April 2016.

Holiday let owners can also claim capital allowances rather than the wear and tear allowance that residential landlords receive. 

There are also capital gains advantages as holiday lets are considered a business asset, not an investment. 

A property must meet certain criteria to qualify as a holiday let for tax purposes. It must be: 

  • furnished

  • commercially let with a view to making a profit

  • available for letting for at least 210 days a year

  • let for at least 105 days a year

  • not occupied by long-term tenants for more than 155 days in a year

  • in the UK or European Economic Area (EEA)

Where is the best place to buy a holiday let?

When deciding where to buy a holiday let, you need to consider:

  • how popular the area is with visitors

  • whether the location has year-round appeal

  • the type of guests you want to attract (for example, families or hen/stag nights)

  • how easy it will be for you to visit the property

  • competition from other holiday lets in the area

Potential downsides to investing in a holiday let

A holiday let can be a profitable investment for many people. But there are a number of potential downsides. 

Running a holiday let involves a lot more work than simply letting a property to long-term tenants. The property will need to be cleaned and checked in between each booking, with fresh linen and towels provided. Repairs will need to be done quickly.

Your ongoing costs will be higher than a buy-to-let property as you’ll need to pay council tax, utility bills, and broadband for the property.

You will need to continuously advertise your holiday let property and deal with enquiries. You can hire an agent to do this but the cost will reduce your profit.

You may suffer void periods in the low season or if the area your property is in becomes less attractive or more difficult to travel to.

10th October 2020