Why “Holiday Let” mortgages grow in popularity (What you need to know)

Category: Blog

In 2015 the Government, the then Chancellor George Osborne, introduced a staged change that increased the tax liability for some investors who bought as individuals.  This coupled with the removal of the 10% ‘wear and tear allowance’ and the introduction of the additional 3% Stamp Duty has been the catalyst for some investors to look for an alternative property-based investment?

What is a “Holiday Let” mortgage?

A holiday let mortgage is specifically for individuals or companies to borrow money to buy a property that will be let out furnished on a short-term basis to holiday makers.

From the mid 1990’s, Buy to Let investments have grown and according to the Council of Mortgage Lenders, lenders advanced more than 1.7 million buy-to-let loans between 1999 and 2015. Buy to Lets are still attractive but there’s a “new kid on the block” making strong head way in this competitive market – “Holiday Lets”, so what has changed to make them interesting to investors?

What qualifies the property as a Holiday Let?

For a property to be classed as a holiday let, rather than a buy-to-let, it must be available for letting as furnished holiday accommodation for at least 210 days per year. This differs to a second home or holiday home where the owner is the sole user of the property.

Can I use a Buy to Let mortgage to buy a Holiday Let property?

No! A buy to let mortgage is used to purchase property that will be rented out to tenants on an assured short hold tenancy agreement, if the property is let on a different basis e.g. as a holiday let then this would be a breach of the terms of the mortgage.  There are specific mortgage products available suitable for Holiday Let properties.

What is the difference between a Holiday Let and a Buy to Let Mortgage?

Both mortgages are the same in so far as they are secured against a property which will be let.  Holiday Let mortgages are not as widely available as Buy to Let mortgages and the main difference is how the income derived from the property is assessed by the lender.  A buy to let mortgage is assessed using the rental value, assuming the property is let on an assured shorthold tenancy.  Holiday let mortgages tend to be assessed using an average of the rental value achievable per week over low season, mid-season & high season, with an allowance made for rental voids.

Important to note that some holiday let mortgage providers will not accept the property being used as an Airbnb. If this is your plan we can also provide advice.

The significant difference in the way furnished holiday letting income is treated by the taxman and this has fuelled the growth in popularity.

Mortgage Interest Tax Relief differences

There is no relief for repayments of capital on the mortgage for either type of mortgage, this remains unchanged.

The changes phased in between 2017 and 2020 see Mortgage Interest Tax relief on buy to let properties being restricted to the basic rate of income tax, this is illustrated in the table below.

This change makes Buy to Let mortgages less attractive for taxpayers above the 20% tax band as historically they received Mortgage Interest Tax relief at their highest rate of tax.

Holiday Lets are not affected by this change and are classed as a business therefore you can deduct all your expenses from your rental income before you are assessed for tax. This includes 100% of the interest you are paying on your mortgage.

Capital Gains Tax differences

If you sell either type of property for a profit, the profit will be liable for Capital Gains Tax. Full details can be found at https://www.gov.uk/capital-gains-tax .

Can I still use the Holiday Let personally?

The answer is yes but you must comply with some rules.  Firstly the ‘taxman’, for a property to be classed as a holiday let it must be available for letting as a furnished holiday let for at least 210 days per year.  There is not an industry standard for personal use amongst mortgage lenders though, some will restrict person use to 4 weeks per year, others are more generous and place limits of 60 or 90 days per year.

The advantages of a Holiday Let Mortgage

  • Expenses fully tax deductible including mortgage interest
  • Tax efficient especially for higher rate taxpayers
  • You can have some use of the property personally each year
  • Higher weekly letting fee chargeable over that of a Buy to Let property
  • If your occupancy level is high your rate of return will be significantly higher.

The disadvantages of a Holiday Let Mortgage

  • Many lettings over the year needs high level of management
  • Most people employ a letting agent to manage and complete cleaning, however this is an extra expense, albeit a tax deductible one
  • On average the property is let for less of a year compared to a Buy to Let property
  • Rental income is seasonal making cash flow management important
  • Property would usually be in a tourist location which can be an excessive distance from the owner
  • Supply and demand rule applies: In areas of high demand the prices of Holiday Lets can be expensive, limiting the normal buying power i.e. you get less property for your money

For details about owning a Buy to Let property

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