Holiday Let Mortgages: A Complete Guide

If you're planning on using a mortgage to purchase a property to short-term let, understanding holiday let mortgages is one of the first and most important steps towards doing so.

We have called upon the experts, B2BFinance, to help explain a bit more about what holiday let mortgages are, how they differ from residential mortgages and how you can go about getting one for yourself.

A market that was thriving even before the pandemic hit, holiday letting in the UK has never been more popular, so if you're looking to invest in a second property, now's the time to do so! That being said, holiday let mortgages can be complicated to navigate (even more so than regular residential mortgages, which are testing in themselves) with far fewer mortgage providers and stricter lending criteria.

But it's not all negative – far from it – because investing in a holiday home can be a brilliant business move. If you're just starting your journey, or find yourself with questions about the mortgage process, this is the article for you. From lenders to finances, here's our guide to holiday let mortgages.

What are holiday let mortgages and how do they differ from residential mortgages?

If you're planning to buy a second property and rent it out as a holiday home, a regular mortgage won't be an option. Instead, you'll need a holiday let mortgage, which allows you to rent your property to guests.

In this case, you need to be aware that there will be occupancy restrictions; you are not permitted to reside in your holiday home for extended periods of time (typically no more than 90 days per year). Holiday let mortgages are a specialist area of finance, and are not well understood in the wider market. Unlike residential or buy-to-let mortgages, you won't be able to find holiday let mortgages at the majority of high street banks, with fewer lenders to choose from. You will also need a larger deposit, usually 25% to 35%.

How do you get a holiday let mortgage?

The first thing to do is to find a good mortgage provider! An online search isn’t likely to be of too much help, as many of the lenders out there don’t promote their holiday let services.

For this reason, it’s a good idea to work with a professional holiday let mortgage broker like B2B Finance, who has expert understanding of how the market works, and can find a suitable lender for you.

Once you’d found a potential mortgage provider (and have double checked that they lend to holiday lets), you need to check whether or not they’re likely to accept your application, as they will only lend to people who tick off certain holiday let mortgage criteria. This will include a minimum income requirement, good credit rating, and evidence of a suitable deposit.

What will holiday let mortgage lenders want to see?

Aside from your own personal situation, mortgage lenders will want reassurance that your chosen property has the potential to be a successful holiday home. This will require you to provide proof that your estimated income is high enough to cover your mortgage costs. To get a realistic projection, it’s important to work with a professional letting agent, such as Sykes, who can provide credible figures.

It’s also just as important that the property itself meets certain standards; mortgage lenders will not want to see any issues that affect the security of their loan. This could be anything from structural issues to occupancy restrictions in the area which would prevent you from renting the holiday home to guests. And, even though they’re very popular with tourists, mortgage providers will only lend to buildings of standard construction, rather than canal boats or shepherds huts, for example.

Are holiday lets a good investment?

In short, yes! So long as you choose the right property and manage things to a professional standard, holiday lets have the potential to generate a very healthy profit. The key to success is to do ample research before you buy, and to put in the work once you own.

Putting together a solid holiday let business plan is important, and this should include comprehensive finances. Consider what you can afford to buy; what overheads there will be (letting agency fees, marketing costs, etc); the costs involved in making the property ready for guests (furniture, amenities, etc); and what your pricing structure will be.

Remember, there are certain tax benefits that come with owning a holiday home. As with any business, you will have to pay income tax on your income, but there are legitimate ways to reduce the amount that you have to pay. For example, you can claim capital allowances on items such as furniture and toiletries, which will be deducted from your profits. Unlike owning buy-to-let property in your personal name there is the chance to offset 100% of your mortgage interest costs from the income the property generates. Also on the sale of your property there is the ability to benefit from Entrepreneur's Relief and reduce any Capital Gains tax you may pay. Finally, there is a the ability to remove council tax costs by converting the property to business rates. In this case subject to some basic criteria the property may be eligible for a 100% business rate reduction.

What do I do next?

If you want to take the leap, here are our first steps to buying a holiday home:

1. Decide what to buy! Think of where you want to set up home, and what type of property you want

2. Check your finances. Work out how much deposit you have, and what you can afford to buy. Don't forget to factor in potential repairs and rennovations, as well as costs of furnishing the property

3. Make a business plan. This should include details of how you're going to generate revenue from your holiday let. Will you use a professional holiday letting agency or go it alone? What marketing will you do? How will you guarantee guest satisfaction, good reviews and return customers?

4. Get your documents ready. You don't want to just phone up the first lender you see and say, 'I want a holiday let mortgage.' You'll need to have evidence ready about your personal financial circumstances, as well as evidence that your holiday home will generate bookings - lenders will want proof that your income can cover the mortgage payments

5. Speak to an expert mortgage broker, Gettting the right holiday let mortgage and having a dedicated finance expert guide you through the process is essential.

Disclaimer

The information contained in this article was accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time, so please contact our prospective new owner team if you’d like to hear how. Nothing in this article constitutes the giving of financial, tax or legal advice to you; please consult your own professional advisor (accountant, lawyer etc). in this regard. If we have referred within the article to a third-party provider of unregulated holiday let mortgages, this is due to the fact that such mortgages aren’t currently regulated by the FCA. As a helpful reminder, your home may be repossessed if you do not keep up repayments on a mortgage, so again anything you decide to do in this particular area this is one on which you should take your own professional advice on too, as we aren’t providingand can’t provide you with this.