Everything you need to know about second properties.
These days, many investors are discovering a pleasant alternative: a UK holiday home which they can let out when they’re not using it themselves.
So, holiday let or buy-to-let, which investment is right for you?
1. Are UK holidays here to stay?
The UK domestic travel scene has seen mixed fortunes over the past few years.
In 2020, despite more people looking closer to home for a break, domestic travel still dipped. Now, according to VisitBritain, the 2021 forecast is for a recovery to £51.4bn in domestic tourism spending in Britain in 2021. Visit Britain has said that this is up 51% compared to 2020, but still only 56% of the level of 2019, understandable while the nation recovers from a global crisis.
But as social distancing rules relax, a recent Best Western report of 6000 customers revealed that 90% of Brits are expected to shun overseas travel in favour of a staycation. And even when the global travel sector returns to a semblance of normality, based on this information it’s unlikely interest in staycations will wane. In the Telegraph’s travel supplement, it was reported that holiday rental bookings across the most popular UK destinations have quadrupled. The BBC also reported that in many cases, there aren’t enough properties to keep up with demand.
It seems likely that professional landlords, who previously operated traditional buy-to-let properties, will increasingly begin to consider holiday lets as a viable option, following tax and regulatory changes. For example, 2021 is the first full year where you can’t deduct mortgage expenses from rental income. This, however, doesn’t apply to furnished holiday cottages which means they can achieve attractive rental yields. So, if you’re deciding between the two, now may be the perfect time to invest in a holiday property.
2. Mortgages for holiday homes, holiday lets and buy-to-lets – what’s the difference?
If you’re looking to invest in a second property, it’s important to decide how it’s going to be used. Should you capitalise on the staycation boom and buy a holiday home that you can let out short term when you’re not enjoying it yourself? Or a buy-to-let property that you can rent out on a long-term basis?
The type of mortgage you need will depend on how you intend to use the holiday home.
If you’re purchasing a holiday home for your own use and don’t intend to rent it out, arranging a mortgage can be straightforward. You’re essentially taking out a standard mortgage, but if you already have a mortgage on your main residence it may be called a second home mortgage.
At Together, we have over four decades of lending experience in personal mortgages, buy-to-let, holiday let and residential investment mortgages. Over the years, we've honed our common-sense approach which enables us to be pragmatic when reviewing all applications. We think outside the tickbox, and make sure an underwriter — not a computer — makes the final decision.
> Get in touch to discuss our personal mortgages.
However, if you intend to let out your holiday home as a business, you’ll need to consider a dedicated buy-to-let mortgage.
A short-term holiday let is a property that is let out to holidaymakers for short periods (usually from three nights up to a few weeks). According to Schofields Insurance, the average occupancy level for holiday lets is between 20 and 24 weeks per year. However, some high performing properties in popular locations can achieve over 40 weeks booked.
There’s no specific length of a short-term let, but generally they are occupied for a few days to a few weeks at a time. A long term let, meanwhile, is generally classed as a property that’s let out for a minimum of six or 12 months at a time. From a financing perspective, there are a few different buy-to-let mortgage options available.
You can get a buy-to-let mortgage on a property you're buying, or a property you already own and want to turn into a rental (like a property you've inherited). The minimum deposit (or equity, if you're remortgaging) varies based on the property and circumstances.
> Get in touch to discuss our buy-to-let mortgages.
3. Regulation and taxation
The biggest difference between investing in a holiday let and a standard buy-to-let is whether it’s classed as a business. A holiday let is treated as a business for tax purposes, whereas a buy-to-let is regarded as an investment, giving rise to investment income. Switch to a holiday let and you'll enjoy different tax rules, and in parts of the UK you may even find them more profitable than traditional rental properties.
For landlords, holiday lets had already begun to grow in popularity well before the pandemic. The significant tax advantages combined with the potential for bigger profit margins and a much higher return per-night, now could be a great time to invest.
What are the conditions to qualify for the holiday let tax advantages?
- The property must be available for commercial holiday letting to guests for at least 210 days (30 weeks) per year and be actively promoted
- If the holiday let is rented out to the same person for more than 31 days, there shouldn’t be more than 155 days (22 weeks) of this type of ‘long term’ occupation per year
- The property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made it available. The time either you or your family use the property is not included in this total.
Landlords of buy-to-let properties, meanwhile, normally pay income tax on any profit made from the rental properties they own. In other words, your profit is the sum left once you’ve added together your rental income and deducted any expenses or allowances. Rental profits are taxed at the same rates as income you receive from your business or employment.
Until recently, private landlords could deduct mortgage interest payments from their rental income when calculating their tax liability. As explained in The Times, since April 2020 buy-to-let landlords have had to pay income tax on the entire rental income, no matter the proportion of mortgage interest.
In recent years, many landlords have been remortgaging their rental properties in an attempt to increase profit margins and reduce debts after new rules on the amount of tax landlords pay came into force in April 2017.
Other landlords have considered purchasing a buy-to-let property through a limited company so costs can be deducted as business expenses, but it’s best to speak to a financial expert to discuss your options.
4. The pros and cons of investing in a buy-to-let property
When it comes to buy-to-let, well-located properties or those found in city centres were historically the most likely to produce consistent, high returns all year round. Now in a post-pandemic world, this trend could shift to suburban or even rural areas, with those looking for home offices or extra space.
But now, lifestyles are changing. Unsurprisingly, after months of lockdown and restrictions, the desire for more space rather than central location tops the wish-lists of UK home-hunters. According to Zoopla, house-hunters are prepared to pay £15,000 for a garden when buying a property, saying it’s as important as a good kitchen and bathroom. With an increasing number of hybrid or remote workers and fewer people electing to commute, smaller town locations like Bradford, Brighton or Sunderland could be a future-proof investment.
However, a buy-to-let investment relies on single tenancy contracts. These agreements are still for a fixed term, tenants can give notice to leave, fail to pay rent, or worse still, cause damage and trouble for the landlord whilst they’re living there. In the worst case, leaving the landlord with costs when they do eventually vacate the property.
> Get in touch to discuss our buy-to-let mortgages to find out your eligibility and best financing options for your investment opportunity.
5. The pros and cons of investing in a holiday let
Unlike a residential let, a holiday let is a tenancy that only entitles the tenant to occupy a fully furnished, self-catering property for a limited period. Holiday let landlords can earn up to 30% more yield than their buy-to-let counterparts, according to Schofields. In fact, they say that at peak season, a holiday home can yield as much in a week as you would in a month from buy-to-let.
While holiday letting may generate more revenue, the risk is higher. Bookings aren’t guaranteed as many unexpected factors can influence this; seasons, weather, and as seen recently, pandemics.
Indeed, a holiday property is likely to be empty for longer periods making the income less constant, and the expenses involved are higher. There are a higher number of occupants, more marketing required, more cleaning, more wear and tear, plus the requirement to provide furnishings – all of which eat into profits.
Sometimes, the most lucrative holiday rental properties are considered 'difficult to mortgage', because of their position, condition, or current use. For this reason, it's valuable to choose a specialist buy-to-let lender, like Together, who use people, not computers, to make the final lending decision.
To support landlords seeking to maximise their holiday let yields, mortgage specialists like Together can provide holiday let finance, available on first and second charge loans, for investors looking to purchase a property or remortgage, with a maximum loan-to-value of 65%.
We’ll also consider lending to borrowers using non-standard properties as security and to a broad range of customers, including limited companies, sole traders, self-employed, expats or those who may have an adverse credit history.
Lending decisions are subject to an affordability/creditworthiness assessment.
Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.