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Mortgages for holiday lets

Looking for a mortgage to buy a holiday home? Our guide to holiday let mortgages explains the options on offer.
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Mortgages for holiday lets. With the right mortgage you could buy a stone cottage on a pretty country road like this one. Perfect to let out to holiday makers or on AirBNB
Mortgages for holiday lets

Buying a property to use as a holiday rental home can be a worthy investment, but it’s worth knowing the facts before getting a holiday home mortgage.

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Holiday lets can be a great investment, especially if you’re keen to own a home that will be used by tourists but can also be enjoyed by you and your family. Unlike a typical buy to let investment, holiday lets will probably have multiple occupants throughout the year, each staying for a week or two at a time.

As a result, you’ll generally have to meet stricter lending requirements, which will differ depending on whether you are buying a property in the UK or abroad.

Either way, if you’re looking to stay in the property yourself and use it as a holiday home from time to time, the holiday let mortgage criteria is likely to be a little stricter than if you let it out constantly.

What is a holiday let?

If you want to buy a holiday home that’s solely for your own use - or that of your family - a standard second home mortgage is probably a better choice. However, getting one might be tricky if you are already paying a mortgage on your main residence or another property; you’ll have to meet tighter lending rules and affordability assessments to prove you can keep up with two mortgage repayments. Holiday let mortgage rates are also usually higher than standard mortgage rates.

What is a holiday let mortgage?

For the purposes of a mortgage, a holiday let is classed as a second home, unless you plan to rent it out for most of the year, or it’s actually the only property you own. So what’s the difference between a second or holiday home and a holiday let?

Second-home versus holiday let 

Firstly, a holiday home is one that is likely to be empty for a large portion of the year. You may come and go for your holidays, but you won't have other visitors staying there and paying rent.

A holiday let property, on the other hand, is an investment and, essentially, a small business, meaning you will be responsible for maintaining the property and trying to attract regular visitors to increase your rental income throughout the year.

Mortgages for holiday lets

How do I get a holiday let mortgage?

Few high street banks and building societies offer holiday let mortgages. Even if they offer standard buy to let mortgages, holiday let mortgages are a different type of risk for them to take on.

This is because holiday properties are not rented out all year round. You may also have peak seasons and low seasons, meaning your rental income is likely to fluctuate.

With a standard buy to let mortgage, you might only need to find one tenant who will commit to staying for a year. This provides more security to the lender that you will be able to repay the mortgage.

What is the difference between a normal mortgage and a holiday let mortgage?

With a holiday let mortgage you face extra checks to ensure you can keep up with repayments, whether or not you will have the home rented out all the time. And you will probably need a larger deposit than you would with a standard mortgage. At the very least, you should aim to raise a deposit of around 25% of the property value to get a holiday let mortgage.

Holiday let mortgage deposit

If you can raise a deposit closer to the 40% mark, it is likely to improve your chances of getting approved for the mortgage.

Holiday let and remortgaging

One way to raise the cash is to remortgage your current property, although only if you have sufficient equity to release from your home. If your current property has increased in value and you have paid off a large part of the mortgage, then you could release enough equity to raise a deposit for a second home mortgage and use it for your holiday property.

What are the benefits of a holiday let mortgage?

Buying a holiday property to let is an investment that requires commitment and perseverance. However, if you can get a mortgage for your holiday rental property, then the rental income can often outstrip the returns you could expect from a buy to let property rented out for the long term. You can also benefit from tax relief that is no longer available to buy to let landlords.

Can I make money on a holiday let?

You can make money via renting the property out and you may get some tax benefits from doing so. If, for example, the property is fully furnished and run as a holiday rental home, it can be viewed as a business venture. So, you could be eligible for receiving tax relief on the mortgage interest payments, as well as maintenance expenses. And just like any other trading business, any losses incurred can be offset against future profits.

How does tax on a holiday let work?

To qualify for most of the tax relief benefits, your holiday property needs to be available to let for at least 210 days each year and to be rented for at least 105 days.

So if you wanted to use the home as your own holiday destination for a few weeks in a year, you could still do that and qualify for holiday property letting tax relief.

If you sell the property for a profit, you will usually have to pay capital gains tax on the money you make from the sale.

What is the difference between a holiday let and a buy to let mortgage?

Buy to let mortgages are mortgages that allow the borrower to let the property out to a tenant, normally using a formal legal letting agreement known as an Assured Shorthold Tenancy (AST) will be used. 

The buy to let mortgage agreement will state that the property should be let out and that it cannot be used by the borrower as their main residence.

Holiday let mortgages allow you to let out a property as a holiday home on a short term basis and also allow the borrower to use the property without having to have a legal tenancy agreement in place. Also, as those using the property pay in advance, there is no such thing as rent arrears.

What  to know before getting a holiday let mortgage

As there are many more precautions taken by mortgage providers when it comes to holiday letting, you are far less likely to get approval for a mortgage to buy a property abroad.

Rental income and holiday let mortgages

Firstly, because it might be much harder to find holiday occupants to regularly rent your property and provide you with the necessary rental income.

Currency risk if your holiday let is abroad

There is a risk when owning a holiday let due to fluctuating foreign currencies, which could unexpectedly lower the value of the property or the value of your rental income. Other risks associated with buying property abroad include unfamiliarity with the local property market and property ownership laws in that country. That’s why overseas mortgages are only usually offered by big banks with offices in the countries concerned.

Holiday let mortgages involve extra checks 

Even when applying for a mortgage for holiday lets in the UK, there are still extra checks and tighter rules. On top of the rental income your holiday rental property brings in, many holiday let mortgage providers will still expect you to have a sizable income from your salary or elsewhere. If you are already paying off a mortgage in addition to the one you hope to take out for a holiday home, then this too will play a large role in how much you might be allowed to borrow.

For example, if your income is £50,000 a year, but have an existing mortgage of around £300,000 left to pay on your main residence, you are unlikely to be approved for a holiday let mortgage, as your income will struggle to cover both mortgage repayments.

So, check first what the additional cost of a second home mortgage will be, and if your finances can handle it. Perhaps even better, check those costs against your finances if you were to lose part of your income or incur large unforeseen costs, such as repairing the roof or having to give up work due to illness.

How to start your holiday let mortgage application

If your finances would still be able to cope and your credit rating is in good shape, you could start looking for a holiday let mortgage. Just be prepared to prove the rental income you can hope to make by renting it out to holidaymakers.

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