We look at the type of mortgage you’ll need if you want to buy a holiday home to let out, including the costs involved and how to find the best deal.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
A holiday let can be an attractive investment as you’ll be able to charge more when the property is let than a regular buy-to-let. You’ll also be able to use the property for holidays yourself.
However, you’ll need a specialist mortgage to buy one if you don’t have the cash already available.
What is a holiday let mortgage?
A holiday let mortgage is a loan specifically designed for properties let out as holiday accommodation.
As holiday homes are let on a short-term basis, you can’t buy a holiday home using a buy-to-let mortgage as these assume that the property is let using an assured shorthold tenancy of at least six months to a year.
And although you may be able to make more money overall with a holiday home, the income fluctuates. This means the rental income you’ll get, which is needed to work out how much you can borrow, is worked out differently.
You can’t use a residential mortgage to buy a holiday let either, as these don’t usually allow you to let the property.
Holiday let mortgages are for properties in the UK. To buy a property abroad, you’ll need an overseas mortgage.
One advantage of buying a holiday home with a holiday let mortgage is that you get a tax benefit no longer available with ordinary buy-to-lets. Since the 2020/21 tax year, residential landlords haven’t been able to deduct any of their finance costs (such as mortgage interest and set-up fees) from their rental income to reduce their taxable income.
Instead, residential landlords only get a tax reduction based on their finance costs at the basic income tax rate, which means they pay more tax now if they’re a higher-rate taxpayer.
However, owners of furnished holiday lets can continue to deduct their finance costs from their income as before. The property must be available to let as holiday accommodation for at least 210 days a year to qualify and be let for at least 105 of those days. This doesn’t include any periods when you’re staying at the property.
However, if you already own a property, you’ll still pay the 3% stamp duty surcharge on additional properties when you buy it.
With a buy-to-let mortgage, you can usually borrow up to 80% of the property’s value (known as the loan-to-value or LTV). In comparison, the maximum with a holiday let mortgage is usually 75%. This is because the short-term nature of the lettings makes it riskier for the lender, so you’ll need to have a deposit of at least 25% of the property’s value. Lending criteria also tend to be stricter.
Additional criteria that may apply include:
Minimum and maximum loan amounts. Loans allowed per property could range from £40,000 to £1 million, depending on the lender
Minimum personal income levels (separate from the rental income you’ll get from the property). This could be at least £25,000 for one applicant or £30,000 for joint applicants, for example, but there may be higher minimums for cheaper deals or bigger loans
As with all mortgages, maximum ages at which you can borrow or when the mortgage term can end – usually up to 85
An expected rental income of 125% to 145% of the mortgage interest, based on a higher interest rate than you will be paying – for example, 5.5% or 2% above the interest rate. This is to make sure you would be able to afford the mortgage repayments if rates went up
A maximum period that you can stay in the property per year, which could be 2 or 3 months
If you own more than one rental property, a maximum portfolio size
You can usually take out holiday let mortgages for multi-unit properties, such as a block of flats and if you are a new landlord. You can also take them out if you want to own the property within a limited company, giving you tax advantages. Interest rates on these are likely to be higher. They also usually allow you to let your property through platforms like Airbnb.
You probably won’t be able to get a mortgage to buy a temporary or moveable structure such as a mobile home.
As part of your application, the lender will also look at your income and outgoings, including any other mortgage you have. It will verify that you can afford to pay back the mortgage and cover the repayments even when your holiday let is empty. You’ll need to show at least two years of accounts if you’re self-employed.
As with buy-to-let loans, mortgages for holiday lets are usually taken out on an interest-only basis.
Holiday let mortgage costs will vary depending on the size of the property, its condition and where it’s located.
Bear in mind that there may be extra costs involved with holiday lets compared to buy-to-let properties. Holiday lets are usually furnished, which is an initial and potentially ongoing cost. You will have to pay the utility bills and for cleaning between each guest unless you do it yourself.
How much of the year your holiday home will be let for will be uncertain. You might make lots of money in high season and very little during the rest of the year, so you’ll need to be able to cover the mortgage payments regardless. If local tourism declines for any reason, your rental income could be reduced.
Owning a holiday let is more time-consuming than a regular residential letting as you’ll have to manage multiple bookings, enquiries and guests’ needs. You will also have to keep on top of how you advertise the property, which is likely to be online.
To find out how much your monthly interest repayments would be borrowing different amounts and at different interest rates or to find out how much you could borrow, you can use a holiday let mortgage calculator. You’ll find a number of them online on both broker and lender websites, so it’s worth trying a few to get the information you need.
Holiday home mortgages are more expensive than regular buy-to-let deals, although bear in mind that you’ll be able to save on income tax by deducting your mortgage interest from your profits.
You’ll find both fixed and discounted variable rate deals, usually over a 2- or 5-year initial period. Rates range from around 2% to 4%. The lower the maximum LTV allowed, the less you’ll pay, and fixed rates usually cost more than discounted rates, but they give you certainty about how much your repayments will be each month.
Make sure you look at the total cost over the initial deal period, after which you’ll be able to remortgage without paying early repayment charges, including any set-up fees rather than just the interest rate when you’re comparing deals. A low-interest rate doesn’t necessarily mean it’s the cheapest overall.
The lenders offering holiday let mortgages tend to be smaller building societies rather than big banks and building societies, and there is a limited number. You may find them at the following lenders:
Cumberland Building Society
Furness Building Society
Ipswich Building Society
Leeds Building Society
Monmouthshire Building Society
Principality Building Society
Teachers Building Society
Vernon Building Society
To find the best holiday let mortgage, it’s a good idea to speak to a specialist mortgage broker as they will be able to look at all available products to find the ones that suit your needs. They will know which lenders are likely to lend to you, and can help you compare the true cost of deals. If you have an unusual situation or a poor credit history, they can make it easier to get a mortgage and handle the application process for you.
As with regular buy-to-let loans, the Financial Conduct Authority does not regulate holiday let mortgages, so if you go direct to a lender, it won’t give you any advice about the suitability of the mortgage you want to take out. However, mortgage brokers do have to be regulated, so you’ll be able to claim compensation if they give you poor advice.
Other ways to finance buying a holiday let include remortgaging your home to release the equity to buy it. However, you won’t then be able to offset your finance costs against your rental profits before paying income tax. Alternatively, if you have most of the money, you can take out a personal loan to make up the shortfall. These are usually available up to £25,000 and can be taken out over one to seven years.