Holiday let versus buy-to-let: let us help you work through the decision

The most important thing to think about when making the decision between short-term holiday letting and the longer-term buy-to-let model is what you’re looking to get out of the arrangement. If your primary driver is that you want a holiday home you yourself can use along with friends and family, the answer is obvious.

However, if you’re looking at your purchase purely as an investment, the decision may become a little trickier. Offering a long-term rental through buy-to-let is arguably the more stable investment prospect, particularly with the cost of living and demand for rental properties as it is today.

But is it the most lucrative? Potentially not.

In fact, holiday lets have become an extremely attractive option, depending of course on location. Between the start of the pandemic and September 2021, it’s been reported that more than 11,000 second homeowners in England have changed their second properties into holiday lets.

This could be due to the boom in ‘staycationing’ resulting from the pandemic and is likely to continue due to the rising costs associated with travel abroad. In fact, the weekly returns on a holiday let are substantially higher than those on a longer-term let…provided you can keep the property filled.

There are also tax breaks and benefits offered by the government and HMRC. Your furnished holiday rental will be treated differently from a buy-to-let when it comes to taxation as it will be classed as a business. This means that tax relief on mortgage interest for holiday lets can be claimed. On buy-to-let properties, this is usually reduced. If this is of interest to you it’s important you speak to a tax specialist for more information about tax reliefs on holiday lets.

There are also differences when it comes to financing a holiday let as opposed to a longer-term buy-to-let as the risk profile is different and lenders will have different criteria. That’s why many lenders these days offer holiday let mortgages as a distinct and separate product.

Are holiday let mortgages widely available?

A holiday let mortgage is designed for people who wish to borrow money to buy a property that they will use for tourists or business travellers, on a short-term letting basis.

A holiday let mortgage will tend to come with a higher interest rate attached than a standard buy-to-let mortgage (which itself is often higher than a residential mortgage). Typically, you’ll also need a larger deposit, around 25%.

The criteria your lender uses to assess affordability for a holiday let is stricter than it would be for a buy-to-let or residential mortgage. This is because it is expected that there will be periods of time when the property is empty. Your lender wants to be sure that even during ‘fallow’ times of year, when the property isn’t rented out, you’ll be able to keep up with repayments. As part of this process, it’s likely you’ll be asked for details of your personal income and expected income from the property as well as all outgoings including any current mortgage repayments.

You’ll also find that holiday let mortgage providers will put a number of conditions on the loan. These might include minimum letting periods and restrictions on how the property can be used. They may even specify how much time you, yourself, can spend there.

Be aware of stamp duty on holiday lets

If you’re considering purchasing a holiday let you’ll need to factor in the cost of stamp duty. This is of course the case for any property purchase in the UK. Stamp duty is based on tiers, with the purchase of a holiday let falling into the higher rates stamp duty criteria due to it being an additional property. This incurs an additional 3% of the property purchase price on top of the usual rates. This is even higher if you’re non-resident in the UK and acts as a tax for those purchasing second homes.

You can find out more about the applicable rates at Stamp Duty Land Tax: Overview – GOV.UK (www.gov.uk)

Learn more about holiday let mortgages and your eligibility for a loan by speaking to one of our specialist advisers.

Note: There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.

Your property may be repossessed if you do not keep up repayments on your mortgage.