Flight cancellations this year combined with the weak pound have prompted some people to consider the benefits of investing in a holiday home in the UK rather than buy to let property.

According to research by Nottingham Building Society, nearly one in 10 (9%) – equivalent to 4.7m adults – are seriously considering buying a holiday let over 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.

Christie Cook, head of mortgage product at The Nottingham, said: “Buying holiday lets is an aspiration for many – with some planning to go on holiday there, a significant number planning to live there permanently in the future and others seeing them purely as an investment. The recent staycation boom has driven interest in UK holiday lets, particularly as the pandemic reintroduced people to the beauty of holidays in the UK.”

Another reason 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 have made being a landlord a lot less financially attractive than it once was. Many of these rules don’t apply to holiday homes, which has boosted their appeal.

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.

Andrew Soye, founder of Holiday Cottage Mortgages (HCM) said: “We’ve definitely seen a shift towards holiday lets in recent months and there’s been a steep change in interest levels.”

Here’s what you need to know if you’re deciding between buying a holiday home or a buy to let property.

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.

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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. The site says that there are now 231 holiday let mortgages available, a 25% increase in the number of available deals available since September 2021. Looking further back, in August 2020 there were just 74 holiday let mortgage deals available.

More lenders are entering this part of the market too, with 27 brands – mainly building societies – offering holiday let loans. This is up from 25 in September 2021 and 21 in April 2021.

“As the desire for a UK vacation rose due to the pandemic, the prospect of earning some extra income through a holiday let has spurred borrowers into action and lenders are catering for this demand,” said Rachel Springall, finance expert at Moneyfacts.co.uk. “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. While the rise in choice is positive, the market is still relatively niche but could grow further with demand.”

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.

Our free mortgage comparison service allows you to compare buy to let deals from the whole of the market and find out how much they could save you. If you’re looking for a buy to let remortgage deal and are nervous about switching lenders, it is still worth filtering for deals from your existing lender (which you can do easily using our comparison tool) so you can see how much you could save from remortgaging with them.

Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.

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.

According to Holiday Cottage Mortgages, lowest initial interest rates at 75% loan to value (LTV) start at around 6.5% fixed for five years and excluding all fees.

In contrast, five-year fixed rate buy to let mortgages start from 4.69% for landlords borrowing up to 65% of the property value, rising to 4.79% for those borrowing up to 75%.

What are the tax advantages of owning a holiday home compared to a buy to let property?

Holiday lets have significant tax advantages compared to buy to let properties. This is mainly because they are classed by HMRC as businesses rather than investments.

New rules are set to come into effect from April 2023 which will mean 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. There are also special tax rules on rental income for properties that qualify as furnished holiday lettings (FHLs).

Mark Collins, head of tax at Handelsbanken Wealth Management said: “From a tax perspective, furnished holiday lets present an unusual hybrid: not quite a business in the conventional sense, but benefiting from a number of useful tax breaks associated with business enterprises unavailable to regular buy to let landlords.

“Furnished holiday let owners can deduct the full amount of their finance costs, such as mortgage interest, from their turnover to calculate their taxable rental profits – unlike residential buy to let – and profits from a furnished holiday let can be apportioned between spouses for tax purposes in reference to the work done. Furnished holiday let profits also count as relevant earnings for contributing to a personal pension which could help reduce the tax bill.”

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.

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:

  1. The property must be available for let for at least 210 days of the year
  2. The property must be fully furnished
  3. 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
  4. 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.

Bear in mind that both buyers of buy to let properties and holiday homes must pay higher rates of Stamp Duty than buyers of residential properties, as a 3% Stamp Duty surcharge applies to second homes.

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.

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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.”