Dreaming of owning your own holiday home to escape to in retirement? Considering buying a property abroad? Here are five things you should think about before taking the plunge…
1. Who will use the holiday home?
Are you looking to buy a holiday home that only you and your family will use or one that you will let out to other holidaymakers? The type of mortgage you need will differ depending on what your plans are for the property. If the holiday home is only for your use then you will simply need a residential second home mortgage. However, if it is to be let out on a short-term basis to tourists then you will require a holiday let mortgage instead. That’s because you can’t let out a residential home as a holiday let without the mortgage lender’s permission and traditional residential mortgages tend not to facilitate this.
Holiday let mortgages are a specialist buy-to-let mortgage designed for borrowers who wish to purchase a property to let out for short periods each year, rather than via an ongoing tenancy agreement. The holiday home must be available to be let out for a minimum of 210 days or 30 weeks a year. This means that you will still get to have your holiday home to yourself 22 weeks a year while generating income the rest of the year. Depending on the location of your holiday let, demand and costs involved it could be possible to make a decent return.
2. Your deposit: size matters
With a holiday let mortgage, you’re likely to need a more substantial deposit than you would on a typical residential property in the UK. Lenders tend to expect a deposit of at least 30% - sometimes up to 40% loan to value - and often there are better mortgage deals available with a larger deposit. So it’s worth saving up as much as you can to get the best deal possible.
If you already own other holiday lets or buy-to-let properties you may also be able to use them as security for your loan.
Typically, the lending criteria for holiday let mortgages tend to be stricter because the fact that the property will not be let out on an ongoing basis makes it riskier for the lender. As well as looking at the projected income the holiday let could generate, banks will want to know you can still afford to pay the mortgage if there are no bookings for a substantial period of time.
Holiday let borrowers also need to show the rental income will be between 125% and 145% of the interest rate on the loan. What’s more, they will also require a minimum income of £20,000 to £40,000 a year in addition to any income from the holiday let and – usually - already own their own property. Interest rates on holiday let loans also tend to be higher than on residential mortgages.
Plus lenders are also selective about the type of property you intend to buy. They don’t tend to lend on holiday park homes, for example, and will need to be assured that the property will be easy to sell in the future.
3. Is your property overseas?
If you are purchasing a holiday let abroad you may wish to use a local lender to do so or a UK bank that has branches in the country. Make sure you find a good local advisor and interpreter who can help guide you through the local bureaucracy, fees and peculiarities of the country’s mortgage and financial system.
While becoming more popular, holiday let mortgages still tend to be a niche product, so it’s worth consulting a mortgage broker. A broker specialising in securing mortgages for holiday homes, whether in the UK or abroad, will know the market well and be able to source deals that might not be available to consumers directly. They’ll also be able to give you independent advice and help you decide what’s the best option.
To find out more, arrange a time to speak to our partner Fluent Money today
4. Tax advantages/breaks
There are a number of tax breaks associated with purchasing a holiday let rather than a buy-to-let property, which makes it potentially attractive. HMRC classes furnished holiday lets as a business and, as such, certain expenses - including mortgage interest - are tax deductible.
In contrast, the tax breaks around buy-to-let properties are in the process of tightening for higher rate and additional rate tax-payers.
You may also be eligible for capital gains tax relief for businesses and entrepreneurs’ relief, plus capital allowances for furniture, equipment and fixtures. However, watch out for stamp duty. For a second property you will pay at least an additional 3% in stamp duty.
It’s also important to factor in any additional costs you may have in relation to the holiday let, such as cleaning and management charges. You will also need good insurance and you are also likely to be liable for utility bills and for council tax or, if your property is overseas, a local equivalent. If you don’t live locally to the property you may have to pay an agency to manage the bookings and changeovers for you, which can take away from your profits.
Always think carefully and get specialist advice before securing a loan on your home.
Written by Piper Terrett, Fluent Money Group