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Holiday let mortgages
If you’re looking to invest in holiday property, a standard buy-to-let mortgage won’t be suitable. You’ll need a specific holiday let mortgage if you plan to rent a property to multiple short-term occupants throughout the year, rather than on an assured tenancy. Our guide to holiday let mortgages explains what they are, how they differ to other mortgages and how to get one.
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What is a holiday let mortgage?
A holiday let mortgage is designed for people who want to let out holiday accommodation for profit. Although it may sometimes be referred to as a holiday home mortgage, this is strictly incorrect, as a second-home mortgage would usually be used to buy a holiday home for private use.
That said, some holiday let mortgages may also allows the owner(s) to stay at the property for a certain number of days per year, allowing them to use it for both purposes.
They also differ from standard buy-to-let mortgages, which only allow residential properties to be rented on a short-term tenancy basis for a minimum term of six months to a year. Holiday let mortgages typically allow seasonal rentals and longer periods of vacancy than an ordinary buy-to-let property, but no single let can be longer than 31 days.
A holiday rental has the potential to make more money overall than a standard residential rental property due to much higher rental charges. However, fluctuating occupancy between seasons can make lenders a bit more cautious when calculating loans for this purpose. They usually use the combined average of your weekly achievable rent across low, medium and high seasons.
Are holiday let mortgage rates higher?
The best holiday let mortgage rates are available to those with the largest deposit, strongest credit score and most well-researched projection of earnings. Properties in popular tourist locations with high-end furniture and amenities usually obtain the highest income - lenders will usually be looking for it to cover 125% -145% of the monthly repayments.
However, rates are usually higher than traditional buy-to-let rates to balance the additional risk of fluctuating occupancy. Holiday let mortgages are usually, but not exclusively, taken on an interest-only basis. Interest-only repayments can keep your costs low throughout the year, allowing you to retain more of your profits during high season.
Are you eligible for a holiday let mortgage?
Holiday let mortgage criteria are usually stricter than traditional buy-to-let mortgages, due to the increased risk. As always, criteria also varies between lenders, but will usually include:
Most lenders require applicants to be homeowners
A minimum of 25%-30% deposit, as the maximum LTV (loan to value) is usually 70-75%
There's often a loan cap of around £500,000 - although you may be able to borrow more at a lower LTV with some lenders
Lenders often have a minimum personal income requirement of £25-£40,000
All property offered on a holiday home basis must be fully furnished
The property will usually need to be able to generate a rental income equal to 125-145% of the monthly repayments
Most lenders limit the number of holiday let properties you can have in total
Most lenders limit the number of days per year you’re able to stay at the property yourself
Lenders usually expect the property to meet certain requirements, such as being in an area with high tourist demand, desirably decorated and marketed, and not a mobile home or caravan - some may even have a minimum property value you can purchase
Some lenders insist that buyers have specialist insurance in place to cover the cost of cancelled holidays and low season
Each rental must be shorter than 31 days or else they won't count towards the 105 days minimum rental period per year necessary for tax benefits
Holiday let mortgages in Scotland
In Scotland there are additional requirements in order to run a holiday let property, on top of those above for the remainder of the UK.
The Scottish Government introduced a licensing regime for short-term lets in Scotland in 2022. Any landlords wishing to rent out a holiday property will be bound by this legislation.
Those taking out a holiday let mortgage in Scotland will need to consider the additional cost of obtaining a short-term let licence. Not having one could constitute a criminal offence, so seeking legal advice about whether or not you’ll need one is highly recommended.
What are the tax implications of holiday rental mortgages?
There is actually a tax benefit involves with holiday rental ownership vs residential buy-to-let property ownership, particularly for independent landlords. This is because you're still able to deduct the associated costs of being a landlord, such as mortgage interest and maintenance, from your taxable income. This is no longer possible for buy-to-let landlords unless they own their property through a limited company buy-to-let mortgage.
To be eligible for this taxable deduction, your holiday let must be fully furnished and available to let for at least 210 days per year. It must also be actually let for half of that available period, or 105 days.
However, there are also additional liabilities to consider, which include:
Additional stamp duty
If you’re already a homeowner, which most lenders will insist that you in order to qualify for a holiday let mortgage, you'll be liable for the 5% stamp duty surcharge for an additional property in England and Northern Ireland. This surcharge is also charged at 8% in Scotland and you may also need to pay higher residential tax rates in Wales too.
The stamp duty surcharge applies to every property owned over and above your own personal residential home. This means that private holiday homes, holiday lets and residential buy-to-let properties would all be liable.
Other tax liabilities
You’ll pay income tax on the rental income earned from letting out your holiday home
Capital gains tax would be payable on any profit that you made from the future sale of a holiday let
A holiday let will form part of your estate for inheritance tax purposes
What are the advantages and disadvantages of a holiday let mortgage?
The rental income can be much greater than for an assured tenancy buy-to-let rental - especially in high season
You can usually use the property yourself for a certain number of days per year
You can claim tax relief on the costs of being a landlord
Property prices are likely to be higher in popular tourist locations, which could limit your affordability
Interest rates on holiday let mortgages are typically higher
You’ll have to pay 5% stamp duty surcharge if you already own another property
There is a greater likelihood that the property will remain empty for long periods, especially during low season
How to find a holiday let mortgage
Holiday let mortgages are a fairly niche product, so it's certainly worth speaking to a mortgage broker with knowledge in this area. They can help you compare holiday let mortgages across the market to find the best deal available for your circumstances.
It’s also worth noting that as holiday let mortgages are not regulated by the FCA (Financial Conduct Authority), advice from a mortgage broker (who must be regulated) offers greater protection versus going directly to a lender.
Holiday let mortgages FAQ
Can you get a holiday let mortgage for an overseas property?
No you can’t, this will need a specific overseas mortgage. You can get overseas mortgages from some UK banks, however, it’s also possible to get a mortgage from the country where you’d like to buy the property in some cases.
It’s a good idea to compare mortgages from home and abroad to see which offer more competitive deals.
Are there any alternatives to holiday let mortgages?
There are no directly comparable mortgage products, however, there are other ways you may be able to raise the cash for a holiday let. For example, you could remortgage to release equity from your own home, if you have enough to make this possible.
It's worth checking out our research into the latest remortgage statistics first, as well as seeking professional guidance from a broker, to see if this is the right option for you.
What is the difference between holiday let and buy to let?
The main difference is to do with the rental contracts that can be used for each. A buy-to-let mortgage usually uses a formal Assured Shorthold Tenancy (AST) letting agreement. This means that the property must be let on a continuous basis for at least six months on one tenancy.
A holiday let mortgage allows shorter rental periods without the need for a tenancy agreement of any kind.
You also cannot live in a buy to let property at any time, whereas a holiday let can usually be lived in by the owner for a specified number of days per year.
Are holiday let mortgages more expensive?
Holiday lets tend to be more expensive than residential purchase in terms of interest rates, as they're classed as a commercial property. They are often also generally more expensive to purchase than traditional buy-to-let investment properties, as they tend to be higher end and more luxury property types.
The deposit requirement and mortgage set up fees are also usually larger, due to the risk and commercial nature of this type of purchase and fewer lenders means less competition in the market.
Lastly, it can be more costly to be a holiday let landlord, as you'll need to cover many of the costs that would usually be covered by tenants in a buy-to-let property - such as minor repairs and household bills.
How much deposit do you need for a holiday let mortgage?
Usually you will need at least 25-30% of the property value as a deposit for a holiday let mortgage, according to buy-to-let statistics.
Can I get a Limited Company holiday let mortgage?
Yes holiday let mortgages are available to both individual landlords and limited companies, although not all lenders offer them.
Can I let my holiday rental property to friends and family?
There is no law against renting your holiday rental to friends and family for free, however, unless you use your own private allocation of days (i.e the days you would be able to stay in the property yourself) this could be problematic for tax purposes.
Any rentals offered to family or friends at a reduced rate or for free won't count towards the minimum rental period to benefit from tax relief. Lenders are also likely to prefer that your rental is let out on an income-earning basis for as many days as possible.