Holiday let mortgages

Last updated: May 2024 | 3 min read

If you want to purchase a property for short-term rental purposes, a holiday let mortgage may be the right financing option. This specialised mortgage product caters to borrowers who intend to rent out their properties to vacationers and holidaymakers. Holiday let mortgages offer a way for investors to break into the lucrative holiday rental market across the UK.

A holiday let mortgage is an option for those who want to buy for renting. When you set out on the journey to buy a new home, this can prove to be a financially viable investment.

What are holiday let mortgages?

Holiday let mortgages cater to those seeking to buy a holiday home for renting out. Unlike standard residential mortgages, these are tailored for properties used as furnished holiday accommodations.

Holiday let mortgages differ in criteria and terms, reflecting the rental and income patterns of holiday homes.

Mortgage lenders evaluate these mortgages considering the potential for inconsistent rental income and the property's dual use: personal holiday enjoyment and rental purposes. Not many lenders offer holiday let mortgages because they are often deemed as a specialised lending product.

If you want to know about what's involved in the process of acquiring a secondary property, we have a more detailed article on buying a second home.

Holiday let mortgages and traditional mortgages

Holiday let mortgages differ from traditional residential mortgages (see more types of mortgages available in the UK). For starters, holiday let mortgage rates often come higher due to perceived rental income risks.

Lenders look at projected rental income rather than just the borrower's personal income.

Unlike residential mortgages, where the owner's income is a primary focus, holiday let mortgages scrutinise the property's profitability.

The lending criteria for holiday lets also include considerations like location, property type, and holiday season occupancy rates.

This is distinct from residential mortgages, where the primary concerns are the borrower's credit history, income, and the property's value as a secure asset.

Differences between 'buy to let' and 'holiday let' mortgages

Lending criteria for holiday lets

Holiday let mortgages come with distinct lending criteria. Lenders require evidence that prospective borrowers can achieve a certain level of rental income.

This figure is often higher than what might be expected from a buy to let property.

Additionally, holiday let mortgage applicants may find that lenders scrutinise their personal income and credit history more thoroughly compared to standard buy to let applications. It's not uncommon for lenders to request proof of income outside of the expected rental earnings, ensuring borrowers can cover mortgage repayments during off-peak seasons.

Rental income considerations

Rental income is a critical factor in holiday let mortgages. Unlike buy to let mortgages, where rental income is generally steady, holiday lets can experience significant seasonal fluctuations.

Lenders will want to see an annual rental figure, projecting a realistic estimate of occupancy and pricing across various seasons.

This can affect how much you can borrow, as lenders calculate mortgage repayments based on the lower occupancy periods to gauge your ability to keep up with payments year-round.

Occupancy rules and restrictions

There are limitations on how many days per year you can personally use the property. Failing to adhere to these restrictions can impact the tax advantages of owning a furnished holiday let.

Local regulations may dictate the maximum number of days per year a property can be rented out, influencing your earning potential and, consequently, the viability of the mortgage itself.

Costs and returns of holiday let mortgages

Keep in mind that there will be many costs associated with buying a new property such as mortgage valuation fee, survey fees and disbursements.

How mortgage interest affects your profits

Mortgage interest payments form a significant part of the ongoing costs for a holiday let. Unlike typical residential mortgage interest, holiday let mortgage interest may fluctuate based on market conditions.

It's not simply a case of calculating repayments on a standard mortgage calculator. Instead, you'll need to account for the possibility of a higher interest rate due to the increased risk lenders associate with holiday lets.

This risk stems from potential seasonal vacancies and fluctuating rental incomes. For effective financial management, factor in these higher mortgage interest payments when evaluating your expected returns.

Understand your mortgage interest's impact on profits: for instance, if you opt for an interest-only holiday home mortgage, your monthly mortgage repayments will cover only the interest, not reducing the principal loan amount.

This option might seem attractive due to lower monthly outgoings, but it requires a strategic plan for repaying the loan's balance at the term's end, possibly from the property's eventual sale.

Calculating potential rental income

Potential rental income is a cornerstone in securing a holiday let mortgage. Lenders want evidence of how much rental income your holiday accommodation can generate.

This figure will determine whether you'll have enough rental income to cover mortgage repayments and other associated costs.

When calculating this income, consider factors such as location, property size, and the standard of the furnishings. A well-located, attractively furnished holiday let can command higher rates.

Use a conservative estimate for occupancy rates, as assuming a full booking calendar is unrealistic and can lead to financial strain.

Also, look into the competition. Analysing rates of similar properties in the area offers a more realistic picture of your potential earnings.

Keep in mind, that lenders might require your predicted rental income to exceed your monthly mortgage repayments by a certain percentage, forming part of the holiday let mortgage criteria.

Seasonal rental income fluctuations

Seasonal fluctuations in rental income are characteristic of holiday letting. High season can bring lucrative rental rates, but it's important not to overlook the off-peak times. Lenders understand these fluctuations.

To maintain a steady cash flow, it's wise to have a financial buffer. This buffer helps manage periods when the property might not be let as frequently.

Diversification in marketing strategies, such as offering short-term breaks or special promotions during quieter months, can help mitigate these seasonal dips.

Planning for quieter periods is just as important as maximising profits during peak seasons.

Some holiday let owners opt for alternative uses of the property during off-peak times, such as hosting workshops or private events. This approach can help offset income dips and keep your financials in balance.

Tax implications and advantages of a holiday let

Holiday let properties in the UK fall under distinct income tax rules compared to traditional rental properties. You, as the owner, must declare any income earned from the holiday let on your tax return. This income is subject to income tax. However, it's important to recognise that the classification of your property significantly influences the amount of tax due.

If your property meets the criteria for a furnished holiday let (FHL), distinct tax benefits apply. To qualify, your holiday home must be available for letting to the public for at least 210 days in the tax year and must be actually let for 105 days.

These requirements ensure the property is genuinely available for holiday occupancy and not just for personal use. The period of 'longer term occupation' (stays of more than 31 consecutive days) must not exceed 155 days in the year.

When these conditions are met, your holiday let is taxed under the FHL regime, offering notable advantages. For instance, you can claim Capital Gains Tax reliefs for traders such as Business Asset Rollover Relief, Entrepreneurs' Relief, and relief for gifts of business assets. These reliefs can significantly reduce your tax liability when selling or gifting the property.

Tax benefits specific to furnished holiday accommodations

Furnished holiday lets (FHLs) have various tax advantages that differentiate them from standard residential buy to lets. One benefit is the ability to claim capital allowances on items such as furniture, equipment, and fixtures within the holiday home. This allowance provides a deduction from your pre-tax income, effectively reducing your overall tax bill.

Eligibility and mortgage criteria for holiday let mortgages

Your financial standing

Your financial situation is the cornerstone of eligibility for a holiday let mortgage. Lenders scrutinise your income, existing debts, and investment history. Review your financial health, considering factors like steady income streams and your current investment portfolio. Clear understanding and transparent representation of your financial standing can significantly ease your holiday let mortgage journey.

Minimum income and mortgage repayment requirements

Minimum income thresholds are often in place when applying for a holiday let mortgage. You'll find most lenders setting a base annual income requirement, which reassures them of your capability to meet mortgage payments, especially during off-peak seasons.

Balancing your income against mortgage payments is not just a lender's priority but a very important step for your financial safety.

Impact of personal credit and financial history

Your credit history plays a central role in securing a holiday let mortgage. Lenders view your past financial behaviour as a window to future reliability. A strong credit score and a history of prudent borrowing and repayments can boost your chances.

Conversely, past financial missteps don't permanently mar your prospects. Demonstrating recent financial stability and responsible credit use can positively influence lenders. Read more on how to boost your credit score.


How much deposit is required for a holiday let mortgage?

Lenders ask for a 25% deposit for a holiday let mortgage, though this varies. Some may accept as low as 15%, or demand up to 30%, depending on circumstances and location.

How can we compare the interest rates to residential mortgages?

Holiday let mortgages usually have higher interest rates than residential ones, reflecting the added risk of rental income. Rates differ across lenders and depend on factors like your financial standing and the property's earning potential.

Can I get a holiday let mortgage for an overseas property?

Obtaining a mortgage for an overseas holiday let is tricky. Few UK banks handle these. Consulting specialist brokers or local financing options is advisable.

Is it advisable to have multiple holiday lets?

Multiple holiday lets can influence your mortgage eligibility. Lenders consider your overall financial health and the profitability of each property.

Should I consult with a mortgage broker?

For those new to holiday lets, a mortgage broker's knowledge can be very helpful. They navigate complex situations and find deals that suit your unique needs. You should consult with an expert in the area of holiday rental investments.

Can companies get holiday let mortgages?

Limited companies can apply for these mortgages, which might bring tax benefits. However, unique lending criteria apply, and professional guidance is required.

What is the future outlook for holiday let mortgages?

Keeping up with market trends is necessary for informed investment. This sector has a great potential for high rental income, capital gain, and tax benefits. The allure is attracting many investors currently and the trend seems to be only increasing. This will make this area highly competitive.

Over the past ten years, domestic travel and vacationing within the UK, commonly referred to as staycations, have witnessed a remarkable surge in popularity. The current climate has given rise to an unprecedented level of demand for holiday cottages located across the United Kingdom.

What are the evolving market trends?

While constituting a smaller subset within the broader buy-to-let mortgage market, the number of lenders offering holiday let mortgages has experienced a notable increase over the years.

The holiday let market is expanding, with lenders offering more diverse and flexible products. Stay informed about economic shifts and regulatory changes to manage investments wisely.

It is evident that short-term accommodation remains a lucrative and rewarding long-term business endeavour for most individuals involved in this industry.

Advice for new entrants in the market

Properties with unique or unconventional features often hold greater appeal among paying guests. Many travellers seek distinctive, aesthetically pleasing, or out-of-the-ordinary accommodations to enhance their vacation experience. The desire for accommodations that are visually captivating and social media-worthy has become increasingly prevalent.

As the sector grows, expect more lenders, including niche societies, to offer competitive and innovative mortgage options.

Your investment will be safe and profitable if your research is done properly on the location of where you buy and how you decide to furnish and market your property.

© 1999 - 2024 Net Lawman Limited.
All rights reserved