Holiday let properties have proved a popular investment in recent years, but changes announced in the Spring Budget are likely to lessen their allure.
According to research carried out by Nottingham Building Society back in 2022*, nearly one in 10 (9%) people – equivalent to 4.7m adults – said they were seriously considering buying a holiday let in the next five years, with another 21% open to the possibility. One in ten (10%) say buying a holiday let to permanently live in one day is already in their plans for retirement, while 56% say that would be a consideration to buy.**
One of the main reasons holiday lets have become increasingly popular is that buy to let property owners have been hit with a series of tax and regulatory changes over the past few years which made being a landlord a lot less financially attractive than it once was. Many of these rules don’t currently apply to holiday homes, which has boosted their appeal, although the Chancellor announced in his 2024 Budget that most of these exemptions are set to be scrapped in 2025.
According to Sykes Holiday Cottages, enquiries from prospective holiday let investors almost doubled in 2022. One in four (25%) only started letting holiday homes during the pandemic, with the staycation boom prompting investors to enter the market. Separate research by Hamptons found that 1,404 holiday let companies were registered in England, Scotland and Wales between January and the end of June last year, the highest number since records began in 2007.
Here’s what you need to know if you’re working out whether to buy a holiday let or a buy to let property, and how the changes announced in the Budget might affect this decision.
If you’re looking for expert advice on getting a buy-to-let mortgage, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice. Your first consultation is free.
Contents
- Why consider a holiday home?
- How holiday home mortgages work
- Which lenders offer holiday let mortgages?
- How do I repay my holiday let mortgage?
- How buy to let mortgages work
- Which lenders offer buy to let mortgages?
- How do buy to let mortgage rates compare to holiday home mortgage rates?
- What are the tax advantages of owning a holiday home compared to a buy to let property?
- What about maintenance costs?
Why consider a holiday home?
Perhaps the biggest advantage of owning a holiday home in the UK is that not only can you rent it out to provide you with an income, but you can also use it yourself, so you’ll never be stuck for somewhere to go.
If you own a buy to let property, you won’t usually be able to stay in the property unless there’s a void period without tenants. However, unlike a buy to let property, where tenants often stay put for the long term, with a holiday let your income can be more erratic, especially out of holiday season. You’ll also need to bear in mind that a higher level of maintenance will be required as guests will be coming and going all the time.
However, holiday homes can be more lucrative than buy to let properties, especially if they are in seaside resorts or other popular holiday destinations, with some properties let for thousands of pounds a week.
How holiday home mortgages work
If you’re thinking about buying a holiday home to let out, don’t be tempted to take out a buy to let or residential mortgage to fund your purchase. If your lender discovers that you’ve done this, they are within their rights to demand full repayment of your mortgage and you may struggle to get a mortgage elsewhere. Instead, you’ll need a holiday home mortgage – these are a relatively niche product, so it’s often a good idea to seek help from a broker specialising in this area.
You’ll need to put down a deposit of at least 25% of the property value if you’re buying a holiday home, although some lenders will require a 35% deposit. The bigger the deposit you have, the better the holiday let mortgage rates you’ll have access to. As well as having a sizeable deposit, you’ll also need to meet lenders’ affordability assessments.
Andrew Soye, founder of Holiday Cottage Mortgages, said: “Most lenders who offer holiday home mortgages will want to see that you have sufficient background or “earned” income, separate from the rent of the holiday let itself, to cover your mortgage costs during any periods where your property isn’t let. They’ll typically require an annual income of at least £20,000 or £25,000+ from a job (employed or self-employed), or if you are retired, an annuity or pension income.
“Lenders won’t usually be prepared to accept income from flexible drawdown however, as they can’t rely on that to keep coming in rain or shine.
“In the current market, the lending conditions have tightened and now most lenders want to see a more aggressive stress test, with expected gross rental income of 185% of monthly mortgage payments, up from 145%. This means you will need to show a robust income projection for your holiday let.”
Bear in mind that the location of your holiday home could also have a bearing on whether or not lenders will offer you a mortgage. Chris Baguley, commercial director at specialist lender Together, said: “Lenders could refuse an application depending on the location of your holiday home – especially if you’re buying a place in an area that has a risk of flooding – like in the Lake District.”
Holiday Cottage Mortgages has a useful Holiday Let Mortgage Calculator to help you work out how much a mortgage on a holiday home will cost you.
Which lenders offer holiday let mortgages?
The number of holiday let mortgage products has trebled since 2020 according to financial website Moneyfacts.co.uk.
More lenders are entering this part of the market too, with 27 brands – mainly building societies – offering holiday let loans.
Rachel Springall, finance expert at Moneyfacts.co.uk said: “There are now more than 200 options available for borrowers comparing buy-to-let deals designed for holiday let, and 27 lenders are on board.”
Building societies offering holiday let mortgages include Cumberland Building Society, Leeds Building Society, Principality Building Society, The Nottingham, Vernon Building Society and Precise Mortgages.
How do I repay my holiday let mortgage?
It’s vital to think carefully about how you’ll clear your holiday home mortgage, and whether you can afford to repay some of the capital you owe each month as well as the interest.
“Most holiday let mortgages can be either on a regular repayment basis, or an interest only basis”, said Mr Soye. “Where interest only is selected, usually the repayment strategy is the sale of the property itself. If you want to pay down your mortgage so you don’t have to sell, then most lenders will allow you to overpay up to 10% of the outstanding mortgage value each year without penalty.”
How buy to let mortgages work
With a buy to let mortgage, lenders will focus much more on the amount of rental income the property is likely to generate, although some will want to look at any other sources of income you have too. Lenders typically look for rental income to be equivalent to at least 125% of your mortgage payments, or sometimes more than this.
Buy to let mortgages are usually arranged on an interest-only basis, which means you only pay back part of the interest you owe each month and none of the capital. At the end of the mortgage term, the property must either be remortgaged again, sold so the capital can be repaid, or you’ll need to have built up enough savings to clear your mortgage.
The specific rates you’ll be eligible for will depend on the size of the deposit you’ve got to put down. As a general rule, as with other types of mortgage, the bigger the deposit, the better the buy to let mortgage rates you’ll have access to. Find out more in our article Understanding buy to let mortgages.
Which lenders offer buy to let mortgages?
There are numerous lenders offering buy to let mortgages, and this type of mortgage is much more widely available than holiday let mortgages.
You can either approach lenders directly to see which buy to let mortgage deals they can offer you, or use a mortgage broker to help you find the best deal.
How do buy to let mortgage rates compare to holiday home mortgage rates?
Specialist holiday let mortgages usually have higher interest rates than buy to let mortgages, because lenders consider them higher risk. For example, they usually consider income from a holiday let to be less reliable than a property you’re letting out to a tenant who may be there long term.
What are the tax advantages of owning a holiday home compared to a buy to let property?
Holiday lets have certain tax advantages compared to buy to let properties, his is mainly because they are classed by HMRC as businesses rather than investments. However, many of these benefits are set to disappear in 2025.
Holiday let properties must be available to rent for a minimum of 140 days a year and rented out for 70 days in order to qualify for business rates, which means they don’t have to pay second home council tax.
If you let out a holiday home under an Airbnb arrangement, you should be entitled to the property allowance which exempts you from income tax for up to £1,000 of rental income a year. If your gross annual property income is £1,000 or less, it is not taxable and it doesn’t need to be reported to the taxman.
There are also currently special tax benefits for properties that qualify as furnished holiday lettings (FHLs). At the moment, the main benefits of a property being considered a furnished holiday let are:
- If you have a mortgage on your holiday home, you can deduct your interest payments from your rental income before your tax bill is calculated. You can also claim capital allowances for wear and tear on the property.
- You can also deduct business operating costs, such as marketing the property, and the price of furniture and other items bought to make the property more appealing to guests, as long as these relate solely to your business.
- If you decide to sell your holiday let, you’ll be able to claim relief on the Capital Gains Tax (CGT) you pay on sale. ‘Business asset disposal relief’ means that you will only pay 10% tax on the sale, and you may be able to delay paying the tax if you use the profits to buy a new holiday home.
However, bear in mind that FHL tax benefits are set to be scrapped in April 2025, so if you have not yet invested in a holiday let, you won’t have much time to take advantage of these benefits before they disappear.
At the moment, to be considered a furnished holiday let and be eligible for tax reliefs on rental income, your UK holiday let must meet certain criteria. These include:
- The property must be available for let for at least 210 days of the year
- The property must be fully furnished
- The property must be let on a commercial basis (so not to friends or family for free) for at least 105 days of the year
- Lets of more than 31 days don’t qualify. If your total of all lettings over 31 days exceed more than 155 days in a year, your property won’t qualify.
However, these Furnished Holiday Let tax benefits are set to be scrapped in April 2025, so if you have not yet invested in a holiday let, you won’t have much time to take advantage before they disappear.
Tax rules can be complicated, so it’s essential to seek professional tax advice if you want to be certain which reliefs and allowances you’re entitled to.
Paul Falvey, tax partner at BDO said: “While owners of furnished holiday lettings are set to lose some significant tax benefits from April 2025, those who choose to sell their property after 6 April 2024 will be able to benefit from the reduction in the higher rate of CGT for residential property gains which is due to drop from 28% to 24%.
“These tax changes make it less attractive to own holiday lets and more attractive to sell them. The chancellor is clearly hoping that this will lead to significant numbers of property owners putting their holiday homes on the market in the 2024/25 tax year.
“Whether this does lead to a significant increase in the availability of rural homes to buy or longer term residential lettings remains to be seen.”
What about maintenance costs?
Remember that your mortgage costs aren’t your only financial consideration when letting a property. Whether you own a buy to let property or a holiday home, you’ll have to make sure it’s well maintained for tenants or guests.
Mr Baguley, said: “Unlike standard buy to lets, holiday lets have to be managed for regular visitors and therefore there may be higher costs, such as paying for a weekly cleaner or managing agents’ fees, so these are things that consumers should consider before making any rushed decisions.
“In addition, if you open your home to paying guests, you’ll need to be prepared for potential damages and repairs being needed more regularly, especially after weeks of wear and tear following the summer holiday season.”
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*Nottingham Building Society commissioned the consumer research company Consumer Intelligence to interview 1,470 UK adults online between June 17th and 20th 2022
**Calculations based on UK adult population as estimated by the ONS at 52.89 million