The number of people looking to holiday in the UK has increased over the last three years. And despite the prospect of 2022 as the year international travel would resume in earnest, the cost-of-living crisis and well-publicised problems with air travel mean plenty will likely stay in the UK again this year, says Tim Woods, Head of Country at Knight Frank Finance.
But with rates on the rise and only a small number of lenders offering a standard residential mortgage that allows you to rent your property for up to 90 days a year – a more affordable option than a holiday let mortgage – we’ve put together five tips for landlords looking to navigate this growing market.
- Weighing up a holiday let vs standard residential mortgage
Getting a holiday let mortgage is a straightforward process. Holiday rental income is assessed using a calculation by the lender: normally no more than 75% loan-to-value. Lenders will assume that you will use a holiday let agent to manage the property and take these costs into consideration, so it’s important to bear this in mind. Your personal income is not used as part of the borrowing assessment but is required as part of the background – lenders generally require a minimum annual income of £25,000.
5-year fixed rates for holiday let mortgages remain popular given the recent increases in the Bank of England base rate and typically start at around 3.59% (at the time of writing).
Rates for holiday let mortgages, however, are higher as holiday lets are deemed to be commercial properties. So, if you’re planning to let your own home or an annexe for shorter periods of time, a standard residential mortgage could be a better option for you.
This type of product requires a slightly smaller deposit of around 20% and is growing in popularity, but it’s important to note that homeowners will only be able to rent their properties for a maximum of 90 days a year. Also, only a few lenders offer them so it’s worth speaking to a whole-of-market broker who will be able to find the best option you.
- Your holiday let income will count towards your affordability
Lenders will base affordability on the holiday let income you forecast, but if you are buying something a little more out of the ordinary then they may also factor in running and upkeep costs. If you’re letting your home for 90 days, the recent cost-of-living increases are likely to have affected lenders’ affordability calculations so you may not be able to borrow quite as much as a month ago.
- EPC changes are coming down the tracks
In 2026-7, new legislation will come into force that prohibits anyone from letting non-energy efficient properties with an EPC rating above band C (i.e. bands D – G). This will make it difficult to secure a mortgage on a poorly insulated property, for instance. At present, lenders are fairly relaxed about EPC ratings but as the new legislation draws closer, rules will begin to tighten. For homeowners and landlords who have a property with an EPC rating of D or above, then, it makes sense to speak to a mortgage broker about what financial options could assist in improving the energy efficiency of their portfolio, such as retrofit finance, because anyone who lets their home out, either short-term or long-term, will need to address this.
Lender fees vary but typically cost around £2,000 and some are based on a percentage.
You will also need to consider stamp duty costs, which for second homes, require you to pay an additional 3% as well as valuation fees.
If you own or are considering buying a flat, then remember to take into account the service charge and ground rent. Running costs such as bills and maintenance – in particular heating and lighting – should also be priced into your calculations as well as how these costs will vary from season to season, depending on the location of your property.
- Speak to a tax specialist
Though rates and fees can vary, different products will change your tax position so it’s always best to speak to a tax specialist before you make any final decisions. For example, you can get some tax advantages for a fully furnished holiday let or if you set up as a limited company.
If you’re interested in the holiday let market and would like to discuss your options, please do book a no-obligation mortgage consultation to discuss your requirements. We have access to all the major lenders in the market, and can help find the most cost-effective and suitable mortgage for you.