Guide to holiday let mortgages

We explain the ins and outs of holiday let mortgages.

Holiday lets can provide a useful second income to buyers. They have special tax advantages too if they are rented out to tourists in the UK or European Economic Area.

So what do you need to know? In this guide, we look at:

• How does a holiday-let mortgage work?
• What are the tax implications of a holiday-let?
• Is a holiday let property a good investment?
• How much does a holiday-let mortgage cost?

Read more: Will mortgage rates come down in 2023?

How does a holiday-let mortgage work?

If you want to buy a home to rent out throughout the year, you’re likely to need a holiday-let mortgage.

This is essentially a loan taken out on the full value of a property that will be part rented out.

These mortgages are available as interest-only or on a standard repayment basis. Lenders typically charge a fee for early repayment.

Differences between a buy-to-let mortgage and a holiday-let mortgage

To qualify as a furnished holiday-let for tax purposes, HMRC has a certain terms you must meet. Your property must be available for let at least 210 days a year and let out for at least 105 days a year. 

Each individual furnished holiday-let property must be short term – no longer than 31 days at a time. Any continuous stay of longer than that period is not counted towards the 105 days in a year.

Lettings to friends or relatives at zero or reduced rates will not be counted either.

The main tax advantages of lets, compared to buy-to-let properties, is that you can still deduct mortgage interest payments from rental income to reduce your profits and therefore your tax bill.

You also get to stay in the home outside that period of 210 days when it must be available to the public. A buy-to-let mortgage is designed for long-term lettings – not for you to live in that property.

Read more: How to fill in a tax return

What are the tax implications of a holiday-let?

If you rent out furnished holiday accommodation, HMRC says you can claim capital gains tax relief for traders, including entrepreneurs’ relief, when you sell the asset.

Owners are also eligible for allowances for furniture and fittings – and if your business makes a loss, you can offset it against profits in future years to pay less tax.

Profits from the business are also counted as earnings for pension purposes.

Are holiday-lets a good investment?

Holiday-lets can be a good investment. The upfront purchase costs can be steep, but holiday-let properties in popular destinations can often be rented out for far higher rates than standard rentals.

Provided you can find enough short-term tenants to fill your property, you could create a handy second income.

Holiday-let mortgage criteria

With fewer providers on the market willing to offer holiday-let mortgages, it can be hard to pin down the lending criteria for being accepted for a mortgage.

Each provider will have slightly different rules, but here are the main points you need to consider.

• Minimum income: Lenders usually require a minimum income of between £20,000 and £40,000
• Minimum and maximum mortgage amounts: Typically, these range from a low of £25,000 to a high of £750,000. Although it can go up to £1.5m. 
• Loan to value: Lenders tend to set a maximum loan-to-value (LTV) ratio of 70%, but it can go as high as 75%. You may get a better interest rate if you only need an LTV of 60%. You will usually need a deposit of 25% to 30%. 
• Rental income: To get the best holiday-let mortgage rates, lenders usually expect borrowers to provide a projection of how much they will earn from their holiday-let. Generally, you must be able to make a gross (pre-tax) rental income of 125%-145% of the monthly mortgage repayments when calculated at a 5.5% interest rate. 
• Personal situation: Most lenders require that you already own your own home and are 21 years of age or older.
• Main residence: Holiday-let mortgages can’t be for a main residence, or somewhere that mortgage applicants have previously used as their main residence.    
• Portfolio limit: Some lenders will set limits on the number of holiday-lets that you can own. This could be as low as a single property.

How much does a holiday-let mortgage cost? 

Holiday-let mortgage costs vary significantly depending on a number of factors. These include:

• The size of the property, including square footage and the number of bedrooms
• Location
• Access by foot, road and/or rail
• The condition of the property

Is a holiday-let mortgage more expensive?

Holiday-let mortgages generally require more money upfront than residential mortgages.

The deposits required are normally 25%-30% of the total value of the property. That compares to the minimum 5% to 10% for standard home mortgages.

You should expect interest rates to be slightly higher than for buy-to-let property or residential mortgages.

This is because:

• It is a niche finance product with fewer providers on the market
• This is a seasonal business where the income may well be irregular and limited to peak times of the year. This poses more of a risk for the lender.

Most holiday-let mortgage lenders tend to be smaller building societies, rather than large high-street banks.

They tend to offer deals on two-year or five-year fixed rates, although variable rates can be found too.

What about holiday-let mortgages for overseas property?

If you are considering casting your net farther afield and looking for a holiday-let mortgage for an overseas property, you have two main options. 

• Borrow from a UK high-street bank that has branches in the location of your foreign property
• Approach a large bank in the country where your property is located

Alternatives to a holiday-let mortgage

Consumers don’t always have to get a mortgage to finance the cost of a holiday-let. They could look at alternative ways to save enough money to buy their dream second home. 

1. Remortgage your own home
   If there is enough value in your current property, you could remortgage it to buy a furnished holiday-let.
2. Cash purchase
   Some investors may be able to afford a holiday-let property outright with no mortgage.
   This means no monthly repayments on a mortgage.
   You will only pay the cost of the property with no additional fees, solicitors’ costs or conveyancing charges on top.

Can I get a normal mortgage and rent out my holiday-let?

Residential mortgages for properties that people want to use as their main home aren’t suitable for holiday-lets.

Remember, buy-to-let properties and holiday-lets are treated as a business, so you won’t be able to secure a normal mortgage on holiday homes that you plan to rent out for part of the year.

There are specialist providers that deal with holiday-let mortgages, though, and it is becoming increasingly common for those seeking a second income in the UK.

What mortgage do I need for a static caravan?

It is not currently possible to secure a traditional mortgage for a static caravan.

However, other types of loans are available so don’t lose hope.

Santander is among the banks that offer consumer loans of two to seven years, with no deposit required.

By design, static caravans are more affordable than other properties. If you are downsizing, selling your current property is likely to cover the cost of a static caravan.