What are Holiday Let Mortgages? 2023 Guide

Published:
November 4, 2022

As more people embrace the idea of staycations and periodic holidays in the UK, there may be no better time to invest in holiday homes for extra income.

Perhaps, you've wanted to leverage the opportunity to rent out homes to holidaymakers but do not have the means to do so; holiday let mortgages are just what you need to make this dream a reality.

Apart from helping you to generate an additional income, holiday let mortgages come with special tax benefits while allowing you to enjoy your own holiday home for some days in a year.

So, what exactly is a holiday let mortgage, how does it work, and what financial, legal, and tax implications should you be aware of? Is a holiday let even worth it? We'll discuss all these and more in detail below.

What is a Holiday Let Mortgage?

A holiday let mortgage is a special loan required for the purchase of a property intended to be rented out to people on holidays, such as visitors and tourists, for short periods.

This mortgage type is exclusively designed for investors who have houses in holiday hotspots and do not intend to occupy these properties by themselves. If you, however, have a holiday home you want to stay in yourself instead of letting out, what you'd need is a mortgage for a second home.

What is a Holiday Let Mortgage?

For holiday lets in the UK, your property must meet the holiday let mortgages criteria, such as being available for nothing less than 210 days of holiday accommodation per year and being advertised as a furnished apartment.

As for the remaining days outside the 210 mandatory holiday let days in a year, you can visit for a vacation. So as a landlord, your holiday let can offer many benefits, from pleasure and income generation to other personal objectives.

How do Holiday Let Mortgages Work?

Holiday let mortgages work like standard mortgages. They are available on standard repayment methods or on an interest-only basis.

This investment type is geared towards generating as much rental income as possible to repay the mortgage and make enough personal profit every month, from which you can maintain the holiday home or improve the facilities.

While the holiday-let property must be available for at least 210 days and rented out for at least 105 days in a year, Her Majesty's Revenue and Customs' (HMRC) terms stipulate that it cannot be let out for more than 31 days at a time.

If you let out the property for longer than 31 days, the extra days are not added to the required minimum of 105 days per year. It also doesn't count if you let the property out at discounted rates or let relatives stay there at no cost. So, you have to manage your letting calendar appropriately.

These terms qualify the properties for furnished holiday let mortgages and make them admissible for tax returns. Even though holiday lets are short-term and more expensive, the tax benefits will boost returns for investors.

Many mortgage lenders also usually charge a fee for early repayment. This is known as a break cost fee, which helps them offset the profits they would have gotten from interest to a certain extent.

The Difference Between Holiday Lets and Buy-to-lets

Holiday lets are rapidly growing as a viable alternative to buy-to-let properties, which are quite popular in the UK housing industry. They both charge rental fees but are completely different in features and how they're operated.

A holiday let is a short-term let, usually lasting only a couple of days or weeks. Meanwhile, buy-to-let properties are long-term, with the shortest tenancy agreements being six months.

When it comes to tax, holiday lets also get a different treatment from tax management authorities. Holiday lets are classified as a business, making your mortgage interest eligible for tax relief claims.

It allows you to deduct payments for mortgage interests to reduce your rental income, profits, and, therefore, the tax bill.

Generally, it will be easier to understand the concept of holiday lets being a business if you think of them as serviced accommodations. That is, they are let out furnished just like hotels, unlike buy-to-let properties.

Another advantage that comes with holiday lets is you can rent them out to holidaying individuals for much more money than normal rentals bring in.

They are usually charged daily when renting out, unlike buy-to-lets that go out monthly. This makes it possible for the owner to rake in more money as rental income. As long as you manage to find renters regularly, you're on your way to generating substantially more income.

However, the occupancy rate is usually lesser than you get on buy-to-let properties, which eventually evens out the rental incomes from both property types. This is also why mortgage lenders offer different mortgage types for each one since they are well aware of the peculiarities.

Do You Need a Specialist Mortgage for Holiday Lets?

The short answer is yes. While the standard mortgages investors get for residential properties do not include the allowance for renting out, buy-to-let mortgages are not suited for short-term rentals.

Calculations for a buy-to-let mortgage's affordability are based on 6 - 12 months of the tenancy. Hence, the criteria are out of reach for intending holiday lets investors. Instead, holiday lets affordability is based on short-term prices during popular holidays.

Are Holiday Let Mortgages a Good Idea?

Holiday let mortgages are increasingly getting popular, and this is evident from data compiled by Moneyfacts. The data showed that holiday let mortgage products moved from 74 in 2020 to 186 in September 2021. Also, it has noted a 72% increase, reaching 320 a year later.

Further growth is expected as the demand for vacations and holiday let mortgage UK market grow. Therefore, they are a great investment for those seeking additional income. There's also the bonus of being able to visit for some time off work.

However, you should know that holiday let mortgages attract higher upfront payments than regular mortgages, but that's also not a cause for worry since you can recover your investments and make profits through higher rentals than traditional properties.

That being said, it's essential to choose the location carefully. While regular properties will likely do well in good residential areas, holiday lets attract more rentals when strategically located.

Consider locating your holiday home in popular tourist and holiday hotspots. Combine that with inexpensive strategies that make your property appealing to visitors, and you are on your way to generating more income through all-year-round bookings.

Holiday Let Mortgage Rates, Deposits, and Finding Lenders

Most high street lenders do not offer holiday home loans, but you should still find other lenders willing to do so. Meanwhile, lenders will offer different deals based on the investor's proposal while assessing their income, deposit amount, and affordability.

Since holiday home loans hardly attract rentals throughout the year, it is riskier than regular mortgages that rent to tenants for longer. It is considered a slightly riskier investment by lenders if you're relying on only the income the holiday let generates to make repayments.

Therefore, most lenders will evaluate an approximate income differently. Earning a considerably large income will boost your chances while existing residential mortgages or large outgoings can impact your mortgage affordability.

Holiday Let Mortgage Rates, Deposits, and Finding Lenders

It is common for lenders to request detailed plans for the holiday lets with the proposed earnings you're expecting and your personal income. The last part is to ensure you can continue repayments in periods when the holiday let isn't generating enough revenue.

Holiday lets are expected to achieve around 125 - 145% of the mortgage amount. As for mortgage rates, they are typically in the region of 2 - 5%, but it's also possible to get lower or higher rates with other factors adjusted to make up for it. For instance, lower rates may attract higher deposits and vice versa.

The most common deposit in holiday let mortgages criteria is 30%. Some lenders may allow a 25% deposit while others may also go higher up to 35 or 40% deposit.

You can find the best holiday let mortgages by employing the services of a mortgage broker. They can help you compare holiday let mortgages based on market conditions and your available resources. It's also easier for brokers to locate specialist mortgages that aren't on the market.

However, the process for getting the best holiday let mortgages is quite similar to other mortgages like buy-to-lets. You simply have to search around to assess interest rates, depending on the kind of rates you want — whether fixed or variable.

Bear in mind that higher deposits will attract lower interest rates and repayment amounts. It is also crucial to monitor inflation rates, which could also factor into your affordability.

If you're thinking of obtaining holiday home loans for properties overseas, there are two major options you can explore. You can approach a UK bank with branches in the location you're interested in. The other option is to visit a lending bank in the overseas location.

What Alternatives Are There to Obtaining Holiday Let Mortgages?

So, what if you're considering starting a holiday let but do not want to obtain a mortgage? You can explore a couple of alternatives to finance your holiday let.  These alternatives are:

  • Buying the property with your own money - As you must have guessed, this is for those capable of affording the property, but this saves you a lot of stress. You do not have to worry about proposals or mortgage applications. All concerns about repayments and interest raises are also automatically eliminated if you choose this option.
  • Taking a personal loan, especially if you already have most of the required amount. You can borrow loans with lower interest rates, lower pressure for repayment, or from a relative.
  • Putting your home up for a remortgage - If you own a home with a mortgage you've settled most of with an increased value, it makes sense to take advantage of the equity to buy a holiday let. This helps you to release a sufficient amount as a deposit for your holiday let.

Conclusion

Holiday lets are a profitable form of investment that's getting increasingly popular in the property market. However, getting the finances you need to establish this investment can be challenging.

Thanks to holiday let mortgages, you can get the necessary loan and pay it back conveniently. Above is everything you need to know about this type of mortgage, but should you have questions, you can reach out to us at Houst.

We are a professional short-let management team who helps property investors manage their properties to improve their income. From pricing and communication to cleaning, we help with all aspects of property management and host your properties on the biggest platforms, from Airbnb to Rightmove.

You can get a free estimate today or read how we've helped our partners make £112M+ managing over 300,000 bookings.

How much could your property earn?

Get A Quick Estimate (FREE)

Takes just 30 seconds.

Our Latest Guides

Our Guide to Short-Let Management