FAQs for Holiday Let
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This will depend upon a number of factors ranging from the type and condition of the property, the location, is it already a going concern and if so, what income is derived during the low, mid and high seasons, the applicant’s income (most lenders have a minimum income criteria), age, health and these are to name just a few. Your adviser will talk through your project with you and discuss all of the issues that will be relevant.
Due to the nature of a holiday let property, lenders may view these as having a higher risk and so generally speaking a minimum of a 25% deposit will unlock most of the marketplace but there are lenders who will consider 20% as a minimum. However, with the increase in risk at 80% LTV, comes the increase in rate. If you can put down a larger deposit, you will likely have access to a greater selection of mortgage options.
You will need a specialist mortgage designed for holiday let properties. You cannot purchase or remortgage a holiday let using a residential mortgage and traditional buy to let mortgages are also unsuitable as the property may only be let out at certain times of the year, rather than on an ongoing basis.
Lenders will assess your application based on several criteria and these will differ from lender to lender. For the purposes of income assessment and affordability, a typical assessment will be derived using an average of the high, mid and low expected seasonal rental income. A reputable holiday letting agency is normally used to provide confirmation of these figures in writing. The lender will then take an average of these seasons over a 24-week period to calculate the annual rental income.
As an example, if high season is £900, mid-season is £620 and low season is £400, this equates to an average of £640 over 24 weeks to give an annual rental figure of £15,360. This then divided by 12 to give a monthly rental expectation of £1,280. The lender will then typically apply an Interest Cover Ratio (ICR) of 145% above the mortgage payment typically using an interest rate of 5.5% as a stress test. Accordingly, the calculation might look like this: –
£1,280 / 1.45 = £882.75 / 0.055 = £16,050
£16,050 x 12 therefore gives a maximum lend of £192,600
Lenders may also require the applicant to have a minimum income level already in place and this too varies from lender to lender but may be as low as £20k pa.
Other stipulations may apply, and your adviser can discuss these with you.
In general, you can expect to pay a little higher interest on a holiday let mortgage compared to a residential mortgage to reflect the lenders’ additional risk. However, potential rental income for popular holiday let properties may more than compensate.
The biggest difference is that holiday lets are rented out over short periods and the rental pattern is seasonal, and this is reflected in how lenders calculate the loan size. Nobody is allowed to use a holiday let as their main residence and lenders assess the projected rental income to calculate the maximum loan available.
Tenants at buy to let properties stay for longer periods and letting is via an Assured Shorthold Tenancy (AST) and lenders assess the loan value based on the AST income. Holiday lets are not permitted under ASTs.
If you select the right property in a popular tourist destination, you should be assured of a healthy return on your investment although it must be remembered that there are no guarantees. Recent events have seen a significant increase in people staying in the UK for holidays and this trend is expected to continue, so rental income from holiday lets is expected to continue to grow.
A holiday let property is treated as a business for tax purposes and if it qualifies as a Furnished Holiday Let (FHL), reduced rates are payable on income tax and capital gains tax. There are additional benefits in capital allowances and how income is treated for pension purposes.
However, as the holiday let is treated as a business, VAT is due if registered and local councils levy tax on business rates instead of charging council tax.
The government currently charge stamp duty on a tiered basis related to the purchase price of the property. In addition, residential property investors are currently required to pay an extra charge of 3%. The purchase of a holiday let would therefore currently attract the standard rate of stamp duty plus the 3% surcharge.
You will need to seek permission from your current lender and this may give rise to a change in the interest rate being applied to the mortgage. If your current lender doesn’t operate in the holiday let market, they may not allow you to switch and ask you to remortgage to another lender.
Tax treatment varies according to individual circumstances and is subject to change.
Those considering setting up a holiday let business should consult a tax specialist to be certain of their tax arrangements.
