Guide to holiday let mortgages

A holiday let mortgage is for individuals who want to rent their property out to guests for short periods. The difference between a holiday let mortgage and a buy-to-let mortgage, is buy-to-let mortgages are meant for when the owner is renting out a property over a prolonged period, typically several years.

What is a holiday let mortgage?

A holiday let mortgage is a loan designed specifically for investment purposes, such as earning rental income when you're not at the property. It's one of the best ways to turn your dream of owning a holiday home into a reality. Whether it's a seaside apartment or a country cottage, this mortgage helps finance the purchase of a property that's suitable to rent out for short periods.

How does a holiday let mortgage work?

A holiday home mortgage functions like a regular mortgage, available on either an interest only or repayment basis. It's an investment, allowing the owner to pay off the mortgage using rental income while potentially making profit in the process. Many people love holiday let mortgages because it enables them to renovate and maintain a property without dipping into other capital if something goes wrong.

What is the difference between a holiday let and a buy-to-let mortgage?

The distinction between a buy-to-let mortgage and a specialist holiday let mortgage is worth noting. The former is specifically for people intending to let out their property over long periods, while holiday let mortgages are only suitable for short-term renting. It's a common misconception that you can use a buy-to-let mortgage to make a steady stream of income from short-term holiday letting. Another key difference is that renting out your property through a holiday let mortgage may generate more income. The reason is that you can charge holidaymakers proportionately higher fees for short-term stays. Choose a holiday let mortgage and providers may view your property as a form of capital gain, earning more money faster.

How do I apply for a holiday let mortgage?

There are several documents you will need to prepare when applying for a holiday let mortgage, including:

• Personal information.
• Proof of income – such as bank statements from the last 3-6 months.
• Existing mortgage information.
• Information about the property you are purchasing.

What are the tax implications of a holiday home mortgage?

From a tax perspective, a holiday let mortgage is a double-sided coin. On the one hand, it could lead to paying more taxes than a traditional buy-to-let mortgage. In a positive light, you may receive capital gains tax relief and allowances for furniture, equipment, and fixtures. Then there's stamp duty. Standard stamp duty land tax (SDLT) is due on all purchases; however, you will also be liable for an extra 3% on your second property—this could be more depending on its worth. With this in mind, it's worth learning more about how second property stamp duty bands are structured before taking out a holiday home mortgage.

Am I eligible for a holiday let mortgage?

There is specific criterion you must meet when opting for a holiday let mortgage, including:

• Salary - the minimum income will vary from £10,000 - £40,000 depending on the lender and will also depend on whether one or two individuals are involved in purchasing the property. You will be obliged to provide evidence of your monthly salary earnings, or the last three years of accounts if self-employed.
• Deposit amount - you may be asked to provide a deposit of up to 25%-30%. This is because lenders perceive holiday let mortgages as higher risk than buy-to-let varieties, where tenants stay for long periods.
• Mortgage amount - lenders will typically stipulate a minimum and maximum amount they can lend. The minimum is usually around £30,000, while the maximum is around £750,000.
• Rental income - lenders will typically expect you to generate a 145% gross rental income of your mortgage repayments when calculated with interest rates of 5%. You will be required to provide proof of your gross rental income to make sure you can make the monthly mortgage repayments. It's best practice to use a professional agent rather than calculate the projection yourself when attempting to secure a holiday let mortgage, so we recommend using a well-regarded letting agent.
• Personal situation - you must be over 21 years of age and own a property.

How much does a holiday let mortgage cost?

Interest rates for a holiday home mortgage are usually higher than regular mortgages. Rates are currently between 2-4%, depending on your deposit. One benefit is that you may be allowed to offset the entire value of your mortgage interest against the rental income.

How much deposit will you need?

Depending on the mortgage lender, you may be required to produce a deposit between 25%-30% of the property’s value.

What factors can affect the cost of a holiday-let mortgage?

There are a few aspects that impact the cost, including:

• Size of the property - larger properties usually result in more expensive holiday let mortgages.
• The property's location - popular areas tend to have higher holiday let mortgage costs.
• Condition of the property - properties that require renovations will usually attract higher costs.

What is the cost difference between a holiday let mortgage and a residential mortgage?

Interest rates are likely higher for a holiday home mortgage than for a residential mortgage. Rates are currently set at between 2-4%. However, as is standard with this form of mortgage, you may be able to offset interest payments with rental income for tax purposes.

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

Yes, just speak to a bank or building society in your home country. You could also talk to overseas lenders (foreign banks or specialist brokers) based in the country you want to purchase a property. But you may need to check whether the lender you approach finances property in that country. Both options have benefits and disadvantages, and you must weigh up the financial implications. Overseas lenders are likely to know the local laws and mortgage market, providing you with better deals and cheaper interest rates. On the other hand, interest rates could be higher, and you might be at the mercy of the foreign exchange market.

Can I get a holiday home mortgage for more than one holiday let?

In short, yes. However, there is no straightforward answer. Some mortgage lenders may limit the number of properties, while others may limit it to a single property. The level of flexibility from a mortgage lender is also likely to depend on your financial and personal situation. To find out more about intasure holiday let insurance. Call us on a 0345 111 0680 *The information above does not constitute financial advice and is meant for guidance purposes only. Your home may be repossessed if you do not keep up repayments on your mortgage.