Offering a means to generate a second income, subsidise your pension, or become your own boss, a domestic holiday let can provide a lucrative way to top-up your earnings or make a full time living. What’s more, you don’t need to be a cash buyer to purchase a home you intend to use as a holiday let.
To explain more, we’ve pulled together this quick guide to holiday let mortgages, which covers off the key things you need to know and consider if you’re planning on purchasing a holiday let in England using a mortgage.
The UK holiday let market
As international holidays continue to be rocked by flight cancellations at airports around Britain, the domestic holiday sector has just celebrated one of its most successful trading periods in a decade. In fact, statistics show that over a fifth of domestic tourists who holidayed in the UK last year booked a self-catering holiday home or apartment over a hotel; a level of spending that amounts to a 10-year high.
For those looking to generate an income from letting, holiday lets can actually command a greater yield than long-term lets, this is supported by holiday let insurers Schofield, whose research claims that holiday let landlords can earn up to 30% more yield than buy-to-let landlords in peak season.
Holiday let mortgages versus buy-to-let mortgages
You might think that a buy-to-let mortgage would also apply to a property you intend to rent out as a holiday home, but you’d be mistaken. A buy-to-let mortgage is intended purely for rentals governed by an AST (assured shorthand tenancy), which doesn’t apply in the case of holiday lets.
Buy-to-let mortgages are also calculated differently from holiday let mortgages, and require a different set of lending criteria. Renting a property as a holiday let when you’ve been issued a buy-to-let mortgage also violates your mortgage terms, and could undermine your credit rating in addition to putting your loan at risk.
How holiday let mortgages are calculated
One of the key ways in which holiday let mortgages differ from buy-to-lets is in regards to how much you can loan. Holiday let mortgages are calculated using your regular income in terms of the loan value, and not rental potential. This is so the mortgage lender can be assured that you can afford the mortgage repayments, even if your holiday let goes unbooked for weeks or months at a time, such as during off-peak holiday periods.
Some holiday let mortgages also operate on a maximum loan-to-value basis, for example 70% LTV. This means that you would be required to front a deposit that’s 30% of the property’s value, instead of the 10% lenders usually require.
Holiday let mortgage lending criteria
As well as needing a higher deposit to secure a holiday let mortgage, there are also exceptions in terms of who can apply.
To qualify for a holiday let mortgage lenders will generally require that you:
- Be permanently employed and over 21 years of age.
- Have a main source of income that isn’t a rental investment.
- Be able to prove your income exceeds a certain threshold each year.
- Have a minimum deposit of 25% or higher.
In addition, the rental property you plan to purchase must also meet specific criteria and you may need to secure rental protection from a holiday letting agent.
Benefits of buying a holiday let using a holiday let mortgage
While a holiday let may not earn you a year-round income or be as easy to secure a mortgage on as a buy-to-let or owner-occupied home, there are some advantages if you do decide to grow your property portfolio by investing in a holiday let.
For one, you can claim more allowable expenses in your end of year tax return on a holiday let than you can on a buy-to-let property. These include letting agents’ fees, mortgage interest, council tax, ground rent and service charges, as well as buildings and contents insurance, and utility bills.
The other big plus of owning a holiday let is that you can stay there yourself for free any time you like when not renting out the property to generate money. So not only can your holiday let be a great source of income that grows in value, you also have a permanent second base in the UK you can escape to whenever the mood takes you.
Get your holiday let mortgage projection today
Contact Threshold today to find out how much you might be able to borrow using a holiday let mortgage.
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