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Financing your Holiday Home

The UK staycation market has boomed over the last few years, with polls showing 80% of people planned a break in the UK last year. An increasing number of investors are looking at financing a holiday home in hotspots like North Yorkshire. Holiday homes can provide a useful additional income and have special tax advantages as well, provided they are rented out as furnished holiday lettings (FHLs).

So what do you need to know about financing a holiday home?

  • How mortgages for holiday lets work
  • Tax implications of a holiday let
  • Holiday-let mortgage rates and lending criteria

A buy-to-let mortgage vs a holiday let mortgage

To qualify as a furnished holiday let for tax purposes, HM Revenue & Customs says that your property must be available to let for a minimum of 210 days each year, and that it must actually be let out for at least 105 days a year.

Each individual furnished holiday let property must be short term – no longer than 31 days at a time; any continuous stays of longer than that period are not counted towards the letting condition of 105 days a year. Lettings to friends or relatives at zero or reduced rates will not be included either.

The main tax advantages of mortgages for holiday lets, compared to buy-to-let properties, is that you can still deduct interest payments from rental income to reduce your profits and therefore your tax bill. Whilst as of April 2020, “buy to let landlords” can no longer claim mortgage interest as an allowable expense on their tax returns. This makes furnished holiday lets an appealing alternative.

Apart from the financial benefits, you can also stay in the holiday home yourself outside the period of 210 days when it must be available to the public; a buy-to-let mortgage is designed for long-term lettings – not for you to live in that property.

What are the tax implications of a holiday let?

If you rent out furnished holiday accommodation, HMRC says you can claim capital gains tax relief for traders, including entrepreneurs’ relief, when you sell the asset.

Owners are also eligible for allowances for furniture, equipment, fixtures and fittings – and if your business makes a loss, you can offset it against profits in future years ensuring you pay less tax.

Profits from the business are also counted as earnings for pension purposes.

Holiday let mortgage criteria...

With fewer providers on the market willing to offer mortgages for holiday lets, it can be hard to pin down the lending criteria to be accepted for a mortgage. Each provider will have slightly different rules, but here are the main points you’ll need to consider:

  • Loan to value: Lenders tend to set a maximum loan-to-value (LTV) ratio of 70%, but it can go as high as 75% – and you may get a better interest rate if you only need an LTV of 60%. You will usually need a deposit of between 25% to 30%.
  • Minimum and maximum mortgage amounts: Typically, these range from a low of £25,000 to a high of £750,000, although it can go up to £1.5m.
  • Minimum income: Lenders usually require a minimum income of between £20,000 and £40,000
  • Rental income: To get the best holiday let mortgage rates, lenders usually expect borrowers to provide a projection of how much they will earn from their holiday let. Generally, you must be able to make a gross (pre-tax) rental income of 125%-145% of the monthly mortgage repayments when calculated at a 5.5% interest rate.
  • Personal situation: Most lenders require that you already own your own home and are 21 years of age or older to be accepted for a furnished holiday let mortgage.
  • Main residence: Holiday-let mortgages can’t be for a main residence, or somewhere that mortgage applicants have previously used as their main residence.
  • Portfolio limit: Some lenders will set limits on the number of holiday lets that you can own and rent out at any one time. This could be as little as a single property.

Is a holiday-let mortgage more expensive?

Mortgages for holiday lets generally require more funds upfront than residential mortgages. The deposits required are normally 25%-30% of the total value of the property, compared to the minimum 5% to 10% for standard home mortgages.

You should expect interest rates to be slightly higher than for buy-to-let property or residential mortgages. This is because:

  • It is a niche finance product with fewer providers on the market
  • This is a high seasonal business where the income may well be irregular and limited to peak times of the year, so posing more of a risk for the lender.

How much does a holiday-let mortgage cost?

Holiday-let mortgage costs can vary significantly depending on a number of factors. These include:

  • The size of the property, including square footage and the number of bedrooms
  • Location
  • Access by foot, road and/or rail
  • The condition of the property

Holiday-let mortgage rates

Most holiday-let mortgage lenders tend to be smaller building societies over large high-street banks. They tend to offer deals on two-year or five-year fixed rates, although variable rates can be found too.

It is worth spending time searching the web to compare holiday let mortgages.

  • For example, Leeds Building Society offers two-year fixed rates on holiday-let mortgages starting at 3.59% at 60% LTV, or 4.09% on the higher 75% LTV.

It also offers five-year fixed rates starting at 3.69% interest rate for 60% LTV and 4.24% interest rate for 75% LTV, with no mortgage-arrangement fees.

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Get in Touch...

Making the decision of financing a holiday home can be daunting but rest assured we’re close by with guidance, ideas, and suggestions along the way ensuring you’ll always remain on track.

Holiday at Home is the booking agent for a unique collection of luxury holiday properties. If you are considering financing a new holiday home or need any assistance, then please do not hesitate to contact our friendly team.

[email protected]

01748 850333

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