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Published 03 April 2024
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Holiday Let Mortgages: Buying a Holiday Home to Rent Out

A holiday let mortgage is used to buy property to rent out to paying guests. Buying a holiday let home can provide you with an income stream and certain tax benefits if you follow the rules.

Owning a holiday property that you can escape to but also rent out is likely to be on many wishlists. If finding the funding to buy a holiday let is the main sticking point, a holiday let mortgage could help that dream come true. 

Below we explain how a furnished holiday let could provide you with an income, valuable tax benefits and a ready-made place to stay if you want to get away.

What is a holiday let mortgage? 

A holiday let mortgage is a loan you take to buy a property that you intend to rent out as holiday accommodation for some of the year as a business. 

Mortgages for holiday lets are different to traditional buy-to-let mortgages, which are designed to fund the purchase of rental property that you want to let out full time.   

Holiday let mortgages should also not be confused with holiday home mortgages, which are loans to buy a second property that only you, or your family and friends, will holiday in for free.  

How do holiday let mortgages work? 

Holiday let mortgages can be available on a capital repayment or interest-only basis, just like many other types of mortgages. Borrowers are expected to make repayments to the lender each month, and early repayment charges will generally apply if you want to pay off your mortgage early.  

Holiday let mortgage interest rates can be fixed or variable, but will often be higher than comparable residential mortgages. This is because of the extra risk lenders are taking in lending against a property that might only deliver a rental income at certain times of the year. 

The lending criteria for holiday let mortgages are also usually stricter for similar reasons. This means you’ll usually need a deposit of between 25% and 30% of the property value to get a holiday let mortgage, and maybe even as high as 40%. 

Tax on holiday lets

Several tax benefits are currently available if you run your holiday let according to HM Revenue & Customs (HMRC) rules so that it qualifies as a ‘furnished holiday letting’.

The tax advantages of a furnished holiday let include: 

  • You can deduct all expenses, including mortgage interest payments and insurance, from your rental income to reduce the amount of tax you need to pay if your property is closed for part of the year.   
  • You can claim capital gains tax relief if you sell your holiday let property.
  • You can claim plant and machinery capital allowances on your holiday let’s fixtures and fittings, furniture and equipment.
  • You’ll be able to count your profits as earnings when working out how much you can pay into your pension.
  • You can offset a loss your holiday let might make against profits made in future years to reduce the amount of tax you must pay.  

Crucially, however, it was announced in the Spring Budget 2024 that the furnished holiday lettings tax regime will be scrapped in April 2025, removing these incentives.

One tax implication to be wary of when buying a holiday let home in England and Northern Ireland relates to stamp duty. A minimum 3% surcharge is usually payable when purchasing an additional property, on top of the standard stamp duty charge. Scotland’s additional dwelling supplement is charged at 6% of the total property price, while higher rates of Land Transaction Tax are payable on additional property bought in Wales. 

Should you sell the property, there could also be implications for capital gains tax.

Qualifying for the furnished holiday let tax rules 

To be classified as a furnished holiday let by HMRC for a given tax year, and qualify for holiday let tax benefits, the property must: 

  • Be fully furnished, with visitors allowed to use the furniture.
  • Have been let commercially to the public as holiday accommodation for at least 105 days in that year (not including days let by family and friends at reduced rates, or long-term lets of longer than 31 days).
  • Have been commercially available to rent as a furnished holiday let accommodation for a minimum of 210 days in that year.
  • Be in the UK or the European Economic Area (EEA).

What holiday let mortgage criteria do lenders consider?  

The criteria for getting a holiday let mortgage tends to be stricter than for other types of mortgages. Criteria can differ between lenders but proving you can afford a holiday let mortgage is key.  

The main holiday let mortgage criteria that a lender will look at include:   

  • Rental yield: Your holiday let will need to have a projected rental income of at least 125% to 145% of your monthly mortgage repayments. 
  • Your personal income: Because holiday let rental income is uncertain and could dry up altogether at certain times of the year, lenders want to know you have sufficient personal income to cover your repayments during these periods. Typically, they’ll look for a minimum income of between £20,000 and £40,000 a year, on top of the income from your holiday let. 
  • Your personal circumstances: For additional security, lenders typically prefer you to be a homeowner already, and usually over the age of 21. Maximum age limits may also apply.
  • Deposit and loan to value (LTV): A minimum deposit of between 25% and 30% of the property value is usually required, with the maximum holiday let mortgage loan-to-value (LTV) usually 75% LTV. The best mortgage rates are usually reserved for those with a larger deposit and lower LTV. 
  • Your credit history: Having a good credit score could mean that lenders are more likely to approve your application. 
  • The property itself: The type of holiday let home you’re buying, and how easy it’s likely to be to sell on, is important to lenders. If the property is unusual in its construction or location, you might find it harder to get a holiday let mortgage.    

Pros and cons of holiday lets

Buying a holiday let has some clear benefits but several potential drawbacks to be aware of too. 

Advantages of a holiday let home

  • It is an investment with the potential to deliver an income stream.
  • Holiday lets can often charge higher rates than traditional rental properties, so you could make more money if it’s regularly booked up.
  • There are tax benefits for qualifying furnished holiday lets, including mortgage interest tax relief. 
  • You, your family and your friends can stay there (as long as you consider the occupancy rules if you want to qualify for tax benefits). 

Disadvantages of a holiday let home

  • Lending criteria are usually strict and mortgage rates are often higher compared to other types of mortgages.
  • You’ll need to furnish your holiday let and meet the occupancy rules to qualify for tax benefits. 
  • Greater uncertainty of rental income means you may need to fall back on your personal income or savings to cover mortgage repayments.
  • The property will need managing and cleaning between guests and maintained to a high standard.  
  • Paying the bills – gas and electricity, council tax, insurance, and so on – will be down to you, not the guests. 

Who offers holiday let mortgages? 

Holiday let mortgages are mainly offered by some building societies and specialist lenders. You may want to use a mortgage broker to help you find the best holiday let mortgages and to give yourself the best chance of application success.

How to get a holiday let mortgage 

To give yourself the best chance of getting a holiday let mortgage you can:  

Gather your paperwork 

All of the documents usually needed when applying for a mortgage – such as proof of your identity, address and income – will be required for a holiday let mortgage as well. Recent bank statements and your latest mortgage statement for your own home will also usually be needed.

Create a business plan 

As you’ll effectively be running a holiday let business, lenders may want to see some form of a business plan. This should detail the rental income you expect to receive, and include evidence to support your estimate, perhaps based on adverts for similar holiday lets in that area. You should also list any expenditure you’re likely to incur, including utility bills, council tax, insurance, maintenance and management of the property.  

Check your credit score 

Making sure your credit score is as good as it can be can give you a better chance of being approved. Check your credit record and take steps to improve your credit score if you can.   

Talk to a mortgage adviser 

Getting expert mortgage advice is sensible when arranging a mortgage. With holiday let mortgages being less widely available, and the additional requirements you’ll need to meet, the support of an adviser throughout the application process could be helpful.  

Can I use a buy-to-let mortgage for a holiday let?

No, it isn’t usually possible to use a buy-to-let mortgage for a holiday let. This is because holiday let mortgages are based around a property being rented out for shorter periods, delivering varying levels of income and perhaps standing empty at different points of the year. Buy-to-let mortgages are offered on the basis that tenants will rent over the longer term. 

Can you get a holiday let mortgage for an overseas property? 

Getting a holiday let mortgage for a property abroad is possible, but you’ll usually need to approach one of the bigger high street banks that have a presence in the country you want to buy or a specialist broker to get one. 

However, remember to be cautious when making big financial transactions abroad and seek specialist support in the country you’re buying in to understand its financial, tax legislation and legal rules. 

Can I get a holiday let mortgage on an Airbnb property? 

Airbnb properties may be eligible for holiday let mortgages, but you’ll need to check with individual lenders whether they fall within their specific lending criteria. 

Can you live in your holiday let?

Holidaying in your holiday let property may be allowed, but it cannot be the main residence where you live all of the time. Specific criteria may differ between lenders, so be sure to check the terms of the holiday let mortgage. 

What are the alternatives to a holiday let mortgage?

If your finances allow, you may want to buy your holiday let home outright as a cash buyer. That way, you won’t need a holiday let mortgage and the income it delivers (after tax and other expenses) will all be yours, rather than going towards mortgage repayments. If you’re only a little short of having all the funds you need, you could consider using a personal loan to cover the difference. 

Alternatively, if you have equity in your main home, you could raise funds by remortgaging to release equity. Depending on the sums, this could be used as a deposit for a holiday let mortgage, or you may have enough to buy the holiday let outright. But there are some potential drawbacks to think about carefully, too.

» MORE: How to release equity to buy a second home

Image source: Getty Images

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