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HomeBuy to LetHoliday let mortgages

Holiday let mortgages

Last updated on 15th September 2023 by Martin Alexander

Owning a holiday home can provide additional income and a place to stay when vacant. Investors buying a holiday home would need a holiday let mortgage.

Getting the right mortgage is crucial if you want to invest in a holiday let or buy a second home to visit occasionally. Regular mortgages aren’t suitable for holiday homes, so you’d need a mortgage for a holiday let.

What is a holiday let mortgage?

A holiday let mortgage is used to purchase a property that can be rented to tourists and visitors on a short-term basis and is purely for investment purposes.

If you don’t wish to let your holiday home and want to stay there yourself, you’ll need a mortgage for a second home. Mortgages for second homes are completely different from those for holiday lets.

Your property must also be suitable for the mortgage you’ve applied for. For instance, your property must be available as holiday accommodation for at least 210 days a year and be advertised as furnished accommodation. Furthermore, the property must be let for 105 days a year.

Even if you let the property for the majority of the year, you’d still have the option of enjoying short visits there yourself. This is why a holiday home can provide opportunities for both business and pleasure.

How does it work?

Like regular mortgages, mortgages for holiday lets are available on an interest-only or repayment basis. The aim of the investment is to generate enough rental income to repay your mortgage and make a profit each month. Furthermore, you can use the income to maintain and improve the holiday home.

What are the differences between a buy-to-let and a holiday-let mortgage?

We’re often asked whether a buy-to-let mortgage can be used to buy a holiday let. The short answer is no. A buy-to-let property is typically let out long-term, with six months being the shortest tenancy. In comparison, a holiday home can be rented for a few weeks or even days at a time.

While buy-to-let properties and holiday homes charge rental fees, the model is entirely different. For instance, a landlord and the owner of a holiday let will have very different responsibilities. Some holiday homes are let as serviced accommodation, very much similar to a hotel and are often let furnished.

The income generated from a buy-to-let will also likely differ greatly from a holiday let. For instance, holiday lets are typically priced higher and are charged per day instead of per month. This allows you, as the owner of a holiday let to potentially generate more rental income than a buy-to-let.

On the other hand, your occupancy rate on a holiday let is likely to be much less than a buy-to-let. This can often even out the differences in income. Lenders know the differences between buy-to-let property and holiday homes, so they offer different mortgages for each.

Can I claim tax relief on my holiday let?

An investment into a holiday let often provides tax benefits, which may be more difficult through general buy-to-let investment. Furnished holiday accommodation is classed as a business, so you can likely claim tax relief on your mortgage interest.

If you run a holiday accommodation business, you can deduct your expenses from your income. This can greatly reduce your tax liability, and the extra income saved can work wonders for your investment.

Is it worth buying a holiday home to rent out?

Holiday lets can be great investments, especially as the staycation market grows. An additional bonus of owning a holiday home is visiting and staying at the property yourself when needed. That being said, upfront costs can be pretty high compared to regular property investment, but you can soon recoup this by charging higher rental prices.

You’ll also have to select your location carefully. A holiday home in a popular destination can achieve bookings all year round, whereas a quiet location can do the opposite. This is why due diligence is always recommended before making any commitments.

Mortgage lenders for holiday lets

The majority of high street lenders don’t offer mortgages for holiday homes. The good news is that there are other lenders in this market, although they offer individual deals based on an applicant’s proposal.

Lenders will base their assessment on your income, affordability and deposit amount. They’ll also request details of your holiday let and the income you hope to achieve. This is because your property must achieve around 125%-145% of the mortgage.

What mortgage rates can I expect?

Mortgage rates for holiday homes currently range between 5.7% and 7%. Higher deposits can unlock lower rates, with smaller deposits doing the opposite. Lenders will project an income valuation as holiday accommodation is rarely booked every day of the year. This gives lenders an idea of the approximate income you’ll achieve from your investment.

Having large existing outgoings, such as your residential mortgage, can make mortgage approval difficult. Even if you earn a sizeable income, having significant outgoings will affect your mortgage affordability.

How much deposit will I need for a holiday let?

Each lender that offers mortgages for holiday lets has a unique method of assessing applicants. That said, most lenders will require a minimum deposit of 30%. Some lenders may agree to a 25% deposit, but it’s rare. Furthermore, other lenders will require a 35%-40% deposit as a minimum.

The reason deposits for holiday lets are higher than regular mortgages is because of the risks involved. Letting out a holiday home is a business, and there are no guarantees it will succeed. The risks are higher if you’re solely relying on the income from your holiday let to repay your mortgage.

Do I need a mortgage advisor to buy a holiday let?

Some lenders only offer intermediary mortgages, which means they’ll only offer specific deals with the aid of an advisor. Furthermore, the mortgage application for a holiday home is nothing like applying for a regular mortgage.

Your application needs to be credible to avoid being declined. This is because your application is more of a business proposal, so the figures need to make sense for any lender to consider you.

Our advisors specialise in mortgages for holiday lets and understand the application process from start to finish. Buying a holiday let is a business and an investment, so getting the numbers right is crucial.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.