The short-term holiday rental market has been thriving ever since the rise of Airbnb brought the sector to everyone’s attention. Gone are the days where holidaymakers and city breakers go straight to hotel booking platforms, their first call is almost always the big holiday let websites.
The constant demand has led to more and more holiday rentals appearing on the UK market. In Q1 2021, across ten of the UK’s most in-demand holiday let destinations, there were a total of 99,314 active rentals on the market. By Q1 2022, this had increased to 100,551, a rise of 1.25%.
The biggest increase has been reported in the Lake District where the number of active rentals increased from 5,693 in 2021 to 7,591 in 2022 – a rise of 33.3%.
Strong annual growth has also been reported in the Peak District (25.2%), the Cotswolds (25%), Cornwall (24.1%), Devon (21.1%), Brighton (13.1%), and Liverpool (10.8%).
Three of the popular holiday let locations have, however, experienced an annual decline in the number of active rentals and these are all located within major cities – London (-17.1%), Newcastle (-11.6%), and Manchester (-1.7%).
The holiday let mortgage
It’s little surprise that the number of people getting involved in the holiday let sector is increasing. There is clear demand and, therefore, the potential to make a good profit. Such is the sector’s popularity that most high street mortgage providers are now offering a specific holiday let mortgage.
What is a holiday let mortgage?
A holiday let mortgage is designed specifically for people who are looking to borrow money to buy a property that they plan to let out on the holiday let market.
It’s different to the familiar holiday home mortgage, which is essentially a second home mortgage because the buyer is the only one who will be using the second property, and it’s also different from a buy-to-let mortgage because the buyer is not going to be letting out the property via long-term tenancy agreements.
The reason a holiday let mortgage needs to be different to the most common mortgage types is because a holiday let is rented out for days at a time rather than months or years. This means income can fluctuate wildly between periods of peak occupancy and months where there is very little income. This less reliable revenue model means a standard mortgage simply isn’t appropriate.
Tax benefits of a holiday let mortgage
As well as the fact that they’re tailor-made for landlords with unpredictable rental income, holiday let mortgages also provide some significant tax benefits for the landlord.
For example, a furnished holiday let is classed as a business. This means it is possible to deduct your expenses from your rental income before submitting your numbers to the taxman. As well as the running costs, this means you can also remove the interest you’re paying on your mortgage.
To qualify for such tax benefits, HMRC has a series of criteria the landlord must meet. For example, the property must be available to let for at least 210 days a year and must be occupied for at least 105 days a year. However, each tenancy can be no longer than 31 consecutive days. Any stays that last longer than 31 days do not count towards that 105 day minimum.
How much rental income do I need to make?
Holiday let mortgages tend to require a deposit of between 25%-30%. Lenders will then look closely at the property and its location in order to assess how much rental income they think it can generate.
This potential income directly impacts the mortgage offer they’re willing to give you. As a rule of thumb, they want income to exceed 125%-145% of the interest payable on the mortgage.
They might also request that you demonstrate your ability to afford the mortgage repayments during those months when rental income is at its lowest or the property is completely vacant. Can you, for example, afford to pay with your savings or other income if needs be?
For example, if your holiday let property costs £250,000, a deposit of 30% or £75,000 will leave you with a mortgage of £175,000. If the interest rate is an average of 5%, your interest-only payment will be £729.17/month or £8,750 per year. This means, to meet the aforementioned criteria of 145% of interest, you’ll need to demonstrate you’ll be able to generate an annual rental income of £12,688 in order to secure a holiday let mortgage.
Jonathan Samuels, CEO of Octane Capital said, “Holiday lets offer a much more private and self-sufficient holiday experience than hotels provide. They provide more space and more freedom. So, it’s little wonder that the market is booming so much in most parts of the country.
“Because holiday lets are now the first choice for a huge swathe of the population, more and more people are thinking about ways to make money off the sector. Some people are simply opening up a spare room in their home, but others are buying new properties with the sole purpose of putting them on the holiday let market.
“While it’s an attractive idea, it’s one that requires careful consideration. The old idiom of location, location, location has never been more appropriate. If you can’t buy a property in a high-demand short-term rental location, you’re going to really struggle to make any sort of profitable income in this sector. It’s about finding locations that offer the perfect balance between affordable purchase price and strong, reliable rental income. This is often easier said than done.”