The Holiday let Mortgages lending market is very small, when compared to other mortgage lending markets. Up until around 13 years ago, mortgages for short term lets, holiday rental complexes and self-catering accommodation, were almost exclusively in the domain of commercial lenders; normally banks.
By contrast, today’s holiday let mortgage providers are mainly small Building Societies that have decided to invest time and effort to understand and enter this small but growing market sector. Out of experience and research they have developed a reasonably deep understanding of the short-term rentals market and have established practices, lending criteria and expertise to assess and underwrite it.
We hope that our Guide sets you up to purchase your own holiday let property or business and enjoy success. Whilst it’s full of helpful tips, hints and case studies, which we think you will find helpful, it cannot cover everything so should not be considered exhaustive. As much as we would like to cover everything and be as client centred as possible, it’s a big ask, because no two sets of wants and needs are ever the same.
Just a small note of caution: Investment in a holiday let property is primarily an investment and like any investment property values can go down, as well as up, as can any income you receive from it…………so please do your homework thoroughly.
We have some case studies here to help you as well. They are real and based on scenarios that we have helped customers with over the years.
We’ve been specialising in this sector since 2006 and we are the UK’s premier mortgage broker for holiday let mortgages. At Holiday Let Mortgages, we’ve built up a massive back catalogue of knowledge that can be drawn on to help you.
Why Invest in Residential Property?
Residential property is an asset of which you will probably have had personal experience. When it is not the roof over your head, but is a property that you let out also, then there is scope for income and not just capital growth. Done correctly, residential property investment has the same potential for return, but with a lower risk than investing in other types of commercial property.
The buy to let property market, due to its size, has not gone unnoticed by the UK Government. It is concerned about property investors taking too many properties out of the reach of owner occupiers, particularly first- time buyers. Consequently, over the last 5 years the Government has introduced 4 changes aimed at cooling attractiveness of buy to let (BTL) property. It is important to note that Furnished Holiday Let is only caught by 1 of those changes.
Are there alternatives to BTL if you want to invest in residential property?
Yes, there are. If you pick up any Sunday newspaper now, there is plenty of coverage extolling the virtues of another type of residential property investment: the holiday or short term let including AirBnB. It takes a similar residential asset but uses it in a different way. So, what’s got them all taking about Holiday Lets? Could it be:
- the opportunity to purchase a future retirement home now, at today’s prices and enjoy some income and growth before eventually moving to it
- the tax advantages enjoyed by Furnished Holiday Lets. Holiday Letting is classed by HMRC as a business, unlike BTL. Not only does Holiday Letting not attract the new treatment of claims on finance costs, but also has several other costs that can be claimed which BTL cannot
- potential for income and capital growth
- benefit of own and family use as a low cost holiday home
UK Holiday Let Mortgages
Firstly, it’s important to explain that a holiday let mortgage is not the same as a mortgage used for a buy to let property.
A buy to let mortgage contract will have different conditions attached to the type of occupancy and will usually specify that an AST (Assured Shorthold Tenancy is in place). A word of caution at this point is necessary: using a BTL mortgage for holiday letting, without the express permission of the lender, constitutes a breach of the mortgage conditions, which can have serious consequences, including forced redemption of the mortgage and damage to your credit rating
Mortgage conditions aside, one major difference between a buy to let and holiday let mortgage is how the maximum loan size is calculated.
In the case of a buy to let mortgage, the lender’s valuer will determine the rent by reference to that produced by a sole AST (unless an HMO). From that rent a calculation is done that will determine the loan size. This includes the lenders safety margin calculation, called in the jargon an ICR (Interest Cover Ratios). The rent for a given property in a given location area is fairly easy to determine by use of comparable evidence.
In the case of a Holiday Let mortgage, the holiday letting income is firstly identified using a projection from a local or national holiday letting agency. Evidence of this projection is required at mortgage application stage. This information is passed to the lender’s surveyor whose remit from the lender is to comment on the value and suitability of the security property and then on the credibility of the projection. Thus, were the projection to come from an agent who is geographically too far away, it might not be credible.
How then is the holiday let rent determined?
There are two ways:
- in the case of a start-up, as explained above, the lender will accept a projected holiday let rental assessment from an appropriate specialist managing agent
- for an established business, by reference to trading accounts. It is possible to use projections if the accounts do not reflect the true picture, but an explanation of how and why the accounts will change is needed. For example, this could be that you will be living on site and not need a managing agent
Who can borrow?
Mortgages to purchase a holiday let property or business are available to:
- Trading Limited Companies
- SPV Companies
Deposit – You will require a good size of deposit if you intend to purchase a holiday let property using a mortgage. As already discussed, within loan to value (LTV) limits, the loan size is determined by the income produced by the property being used as a holiday let. If the deposit is not available from non-borrowed sources, such as investments or savings, then it may be possible to capital raise from equity available in other properties, such as a main residence or buy to let properties.
In some cases, where the potential borrower owns other un-charged UK investment property, it may be possible to secure a holiday let mortgage across the target purchase plus existing property(ies), meaning no cash in (cross collateralising). This can sometimes be a useful tool when income from the holiday let purchase is not as strong as it needs to be in order to support the loan size required. By cross-collateralising additional security, and if there is income from that existing property, then the rental from that can be tied in, which can easily make a marginal lending deal good, swinging the decision in favour of the purchaser.
Gifted deposits from very close family (Mum and Dad) are acceptable, providing the gift is non-returnable (without reservation).
Always talk to us about the source of deposit as it can affect the deal going forward.
Other Holiday Let Mortgage Criteria
As mentioned earlier in our Guide, if a case is outside the criteria for standard products, then it can still be considered based on its merits. So, if there is something mentioned below, that you believe excludes your case, please do call us to see what we can do.
- Loan to value:
- up to 60% LTV to a maximum loan of £750K available on standard products
- up to 75% LTV, maximum loan of £1.5m on standard products
- Income Cover Ratio: rent has to cover the mortgage with a safety margin of 25% to 45%, with the mortgage calculated at a safety rate of 5.5%. NOTE: this not the interest rate you will pay
- Status: generally, you must be an owner occupier; however, exceptions can be considered
- No Minimum personal income required in some cases
- Property types: most construction types, except 100% timber are accepted
- Ex Pat applications available
- Locations: England, Wales, Scotland, including Skye, Aran, Mull and certain other Inner and Outer Hebrides. Scilly Isles in certain circumstances
- Properties with usage restrictions, normally limited to 60% LTV but can go to 70% LTV
- Multiple units, mixed use holiday let, barn conversions for Holiday Let use only
- Applicants with property portfolios, including portfolios of holiday let acceptable
How often do we think about retiring to an idyllic countryside or seaside location? That lovely cottage in a village with a little pub a short walk away? Perhaps in a place that we have visited on holiday?
Some people do move to a dream location on retirement, but in most cases the retirement property is not purchased until sale of their main home. This strategy can be risky, as properties in quality locations are always much sought after. There is the risk that demand will push prices up faster in such locations, outperforming prices where the future retiree is currently living!
This of course can reach a point where the dream move becomes unaffordable, particularly as obtaining a mortgage in retirement can be difficult. Purchasing a holiday let now gives a buyer the potential to purchase a future retirement property at today’s prices and to use the income from furnished holiday letting to subsidise, or even pay for, the costs of ownership until retirement. In the interim, owners can of course have the occasional holiday at the property thus saving even more money.
Of course, you will continue owning your main home and continue enjoying potential capital growth until such time as you sell up. It being your main residence, when you sell the profit will be free of Capital Gains Tax and use it to pay off the mortgage on your holiday let.
Running a Furnished Holiday Let has some significant tax advantages over Buy to Let investment. HMRC treats holiday letting as a business, which has positive tax implications. You should consult a professional tax adviser for detailed guidance on the workings of the Furnished Holiday Letting tax regime. The following are only are some of the highlights and not intended as any form of Tax advice:
- you may be able to claim Capital Gains Tax reliefs for Traders (Business Asset Rollover Relief, Entrepreneurs’ Relief)
- you may be entitled to Capital Allowances for items such as furniture, equipment and fixtures
- the profits are currently classified as earnings for pension purposes
- currently, you can offset the full amount of interest, against rental, when calculating profits, providing HMRCs conditions are met
- the new treatment on buy to let finance costs does not apply to furnished holiday lets (FHLs)
- The property must let commercially, which means that your intention is to make profit. Circumstances where you make large regular losses may be require explanation to HMRC
- All your FHLs in the UK are taxed as a single UK FHL business and all FHLs in other EEA states are taxed as a single EEA FHL business
- The property must be available for at least 210 days per year and physically let to the public for 105 days. Short Term Lets to any one occupant of more than 31 continuous days do not count towards the 105 days, unless your holidaymakers have met with unforeseen circumstances which prevent them from leaving in some way. Any days when your property has been let to friends or family at a reduced or zero rate, do not count as a commercial let
Potential for Income and Growth
Owning a holiday let property has all the same potential for income and growth as a BTL investment. Holidaymakers pay for the rental in advance and because there is no legal landlord-tenant relationship created, there are no tenant problems.
Own and Family Use
Most owners of Furnished Holiday Let Property get some degree of personal use from it. The trick is to balance own use with return.
What to buy and where to buy it?
Switch on your TV set on any given day and there is almost certainly going to be a TV programme that involves buying a property to make money; buying at auction, development and rentals, you know the type of programme. Notice that the TV companies are not producing shows that are all about making money out of stocks and shares! People in the UK are fascinated by property.
The TV shows offer lots of guidance on what and where to purchase property to make money. However, the overriding guiding mantra is still “location, location, location.” We all know it’s about the principle of supply and demand; economics at its simplest.
Our Guide to Holiday Let does not hold itself out as being the defining tome, it’s simply a guide to help you start asking questions. The aim of this section is to focus your thought process around the principle of location and utility.
In the world of holiday let, when assessing your visitor’s utility needs, ask yourself, ‘If I were holidaying at this location, what would I like to have at the property and in the area for the holiday to be memorable for the right reasons?’ The final decision on where you decide to purchase your holiday let may well depend on as many personal considerations as it does financial.
If you are intending to move to the property on retirement, an area with a high seasonal rental yield may be of secondary importance. If high holiday let rental income is a priority for you, then you will need to choose an appropriate location. A property linked to the coast will usually have a shorter season than one linked to outdoor activities that can run virtually all year-round. So, a property on the coast of Cornwall may have a 20 week season compared with the Lake District with its potential 42 week season. If you are looking for a high yield, a long season is important. Some of the architecturally beautiful towns like Bath and walled cities like York and Chester have long seasons, because of what they offer.
There are no shortcuts to researching your location well, whatever your future goals.
What are the costs of Holiday Let Property Ownership?
The types of costs involved in owning a holiday let property are not that dissimilar to those associated with owning your main home. This quite different to BTL. You will be responsible for paying the Council Tax and utilities. If you provide broadband/telephone line/TV, you will need to pay for all of these services.
If you choose to use a managing agent to attract your guests and take care of the meet and greet situation, you will pay anything between 18% and 30% (plus VAT) for a full management service.
We recommend looking closely at what services are provided before signing any agreement. The agent’s fees will not include the cost of laundry, gardening and disposing of rubbish.
The general rule is, the lower the cost, the more exclusions in the service offered…………in other words, you get what you pay for.
If you need a mortgage to purchase your holiday let property, this will be a regular financial commitment. We will be able to help you to understand your future cash flow situation, including how this will be affected by an interest rate increase.
Here are some of the costs you should budget for when running a holiday let property. Some are property type specific, so not all will apply:
- Providing and renewing all the soft furnishings
- Decorating to keep the house fresh
- Mortgage fees and monthly payments
- Property insurance
- Council Tax
- Letting Agent management fees (plus VAT)
- Cleaning, laundry
- Rubbish disposal, gardening
- Utility bills
- Service costs
- TV licence
- Ground rent
- Repairs and replacements
A word on cashflow
Over the years, we have found that some holiday let properties do not pay for themselves on a cash flow basis. In most cases where cashflow does not support all the costs of running the property, the reason is that the owners were looking for a part subsidised holiday home, i.e. it is not let out to its full potential, or when the underlying purpose is to acquire a future retirement home now……or a bit of both! Thus for such circumstances, it does not cause the owners much of an issue, and they are aware at outset and have the resources to subsidise their purchase
Properties that need a decent amount of work to bring them up to the standard expected by holidaymakers are unlikely to fit the routinely advertised Holiday let Mortgage products. The reason is quite obvious – they won’t be in a position to income producing immediately and it that income which the lender relies on to pay the mortgage. Such a situation is normally dealt with by using other lending products such as a bridging finance facility to purchase. The facility can remain in place until such time as a long-term loan is available, usually when the refurbishment is complete. In some cases, however, if the refurbishment is very light and the customer can demonstrate that they have the resources to support all of their financial commitments, including a holiday let mortgage, plus fund the works, we may be able provide an option that will avoid the need for a bridging loan………..please ask!
We are Holiday let Mortgages, a specialist broker in finance for holiday and short term let property. This is the third edition of our guide, the first was issued in 2008, so you can see, we have been around a while. It’s our hope that you have found the new edition of our guide useful and informative. As we stated, it would be impossible to cover every aspect of holiday letting and its incumbent finance, so it you have any questions, please contact us.
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