Is it too late to invest in the UK holiday let market? | moneyfacts.co.uk

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Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 26/05/2021
The demand for holidays in the UK has been high due to the restrictions in place on international travel.  The lifting of these remains uncertain and demand for the Summer holidays continues to outstrip supply in the UK’s holiday hotspots. 
Mortgage lenders have responded to this uptick in demand and there are now 154 holiday let mortgages available, not far off the pre pandemic levels of 162 in March 2020. However, despite having interest rates at historic lows, borrowers on average will pay a higher rate of interest. The average fixed interest rate for a holiday let mortgage remains higher than those available just before the pandemic, increasing from 3.37% in March 2020 to 3.93% in May 2021.
Even with the cost of borrowing being higher now than last year, there can still be still benefits to buying a holiday let investment. We explain more about tax relief, stamp duty and borrowing options for those looking to buy or redevelop a holiday let property.

 

Potential for greater rental yields

Those running a holiday let business have the potential to make greater yields and lower cost of sale than compared to a buy-to-let property. This is because eligible holiday lets qualify for more favourable rates of tax relief and capital gains tax. 
A holiday let can qualify for tax relief if it meets certain criteria:
  • Properties must be in the UK or European Economic Area (EEA) 
  • The property must be available for let at least 210 days of the year.
  • For at least 105 days of the year the property must be let on a commercial basis (i.e. not let to family member for free)
  • Lets of more than 31 days do not qualify and if your total of all lettings over 31 days exceed more than 155 days then the property does not qualify
  • The property must be fully furnished
Holiday lets also have a lower rate of Capital Gains Tax (CGT) at 10%, compared to 28% for higher and 18% for basic rate taxpayers for buy-to-let property and holiday lets that are part of a business could pay business rates rather than council tax. Business rates are also often lower than the equivalent council tax on the same property. Holiday lets can also offset some of their operating costs against tax, for example cleaning fees or items of furniture or equipment for the property.
Any profits made from a holiday let property is taxed at the relevant rate of income or corporation tax. Holiday let property owners should check if their earnings will take them into a higher tax band and those saving for a pension can use these towards their income for pension tax relief.  

Those considering setting up a holiday let business should consult a tax specialist to be certain of their tax arrangements. 

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Increasing the yield of your holiday let

Those wanting to maximise their rental income from a holiday let will need to get their occupancy rates as high as possible during off peak seasons. Creating a desirable off-peak offering needs you to understand what appeals to your typical holiday visitor and then investing in these features. These can range from the expensive, for example a high-end kitchens for the gastronomes, a hot tub, or a wood burner to make cold days and nights cosier or the small things such as wellington boots, fleecy blankets and hot water bottles.

Stamp duty and holiday lets

The stamp duty holiday has been extended and is available on buy-to-let and holiday let property sales that complete before or on 30 September 2021. These rates are advantageous for buy-to-let and holiday-let buyers compared to standard rates. For example, properties at £250,000 have a stamp duty rate of 3% compared to 5% before the holiday scheme was in place. Buyers wanting to take advantage of the stamp duty holiday will need to act quickly as a specialist holiday let mortgage could still take many months to complete. An alternative for those needing to access capital fast is a bridging loan, while rates and fees can make this more costly, completions times can be days or weeks. Buyers should consider the benefit of the stamp duty saving offset by the higher costs of this finance, while also being able to open more quickly for the peak Summer season.


Calculate the cost of stamp duty using our calculator.

How to finance a holiday let property

Those looking to buy a holiday that need finance should look for a specialist holiday let mortgage or a form of bridging finance. 
Borrowers can use a holiday let mortgage, much the same as a buy-to-let mortgage and will usually need a minimum 20% deposit and meet the lender’s requirements on rental returns. Borrowers should consider smaller lenders, such as building societies and non-traditional lenders for a holiday let mortgage. 
Those wanting to buy a holiday let quickly from an auction or a property that needs redevelopment may need to opt for a bridging loan instead. These usually come with higher interest rates than a holiday let mortgage and higher fees, but completion times can be weeks and not months. In addition, bridging lenders will also consider properties often not acceptable to other lenders under a mortgage.
An example of using a bridging loan to refurbish a holiday let is from Matthew Rees. Mr Rees is a property developer of some experience and wanted to buy a £1.65 million home in St Mawes in Cornwall and refurbish this as a high end, exclusive holiday let. Mr Rees used Together a specialist lender. 
Mr Rees, said: “It has incredible views across the bay at St Mawes and it’s unsurprising it inspired so many fantastic artworks. The holiday let is one of the few properties in the area that has its own private quay leading directly into the bay and, following some minor refurbishments and improvements, I’m ready to welcome families and guests to enjoy the fabulous property this summer.”
Chris Baguley, commercial Managing Director at Together, said: “Even before the pandemic, we were seeing dramatic changes across the buy-to-let landscape with holiday lets steadily increasing in appeal – more so than for traditional buy-to-let properties – as they allow people to tap into the UK’s many tourism opportunities.”

A mortgage broker or bridging broker can be a useful ally in navigating a way to a good deal.

Find out more about specialist holiday let mortgage providers.

Speak to one of our preferred brokers

Those looking for a specialist holiday let mortgage can contact Mortgage Advice Bureau on 0808 149 9177.
Those looking for a bridging loan can speak to one of our specialist bridging brokers.
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