The UK holiday let industry has been steadily growing in popularity among property investors and holiday goers alike and doesn’t look to be slowing down anytime soon! Commercial Consultant, Andy Elley, explains what the benefits are and the type of investments we’re seeing.
My clients have been heavily investing in the holiday let sector over the last five years. The yields available on holiday let properties have rocketed, and it is no surprise to see well-maintained properties, in the right locations, producing yields over 12% per annum. Here at Mortgages for Business, we’ve seen first-time and seasoned holiday let owners investing extensively, and many experienced landlords diversifying their portfolios in this sector.
Prior to the COVID-19 pandemic, the UK holiday let industry was experiencing high booking levels as the Euro to Pound exchange rate attracted plenty of international holiday-makers, and UK residents were encouraged to stay in the UK by the warmer summers. Although international tourism wholly disappeared due to the pandemic, the “stay-cation” boom saw record booking numbers from UK residents. With many now reluctant to travel abroad for their holidays, we expect the UK holiday let industry to continue to benefit for a good few years to come, with the properties acquired over the last few years generating great cash-flow, and pretty decent capital appreciation too (10% in the last year alone!)
Pandemic aside, holiday let properties offer some landlords an alternative tax-efficient investment vehicle. This has been felt even more by landlords since the full loan-interest tax-relief restrictions came into force in April 2020. From a tax perspective, to benefit from the more favourable treatment of loan interest the property must be available to let for at least 210 days in the tax year, and actually let for 105 days. There are many taxable allowance offsets available depending on your circumstances, for example: council tax, repairs, depreciation of the fixtures and fittings, and loan interest against the profit and loss account. To find out how this applies to you, please do seek professional tax advice before making any decisions.
What types of property are classed as holiday lets?
We finance a wide variety of properties for the holiday let market. It’s fair to say that Airbnb has diversified the sector, both in terms of location and property types that people look for. It’s no longer just week-long, cottage holidays in the countryside!
Over the last couple of years, we have sourced mortgages for large and small houses, large flats, properties situated above commercial property (or in one block), blocks of flats on one title to name but a few! We’ve also encountered challenging covenants which only allow the property to be let as a holiday let, and we have arranged finance for more extensive holiday let complexes.
How are holiday lets financed?
A few holiday let lenders calculate mortgage affordability based on the projected holiday letting income. This method allows the for potential higher levels of borrowing. The majority of lenders calculate the maximum borrowing for holiday let applications based on estimated rental income on an assured shorthold tenancy basis (much like a buy to let loan). As an example:
A £600,000 four to five-bedroom property in Devon or Cornwall would most likely generate significant holiday letting income of approximately £60,000, which is a 10% yield (before booking and changeover costs). For this, borrowing of say £450,000 is easily achievable, whereas the comparable standard AST-based rental income may be as low as £18,000 per annum, just a 3.3% yield. Borrowing in your own name could be between £325,000 to £350,000 maximum.
A recent conversation with one of our major holiday let lenders revealed that Mortgages for Business places 8% to 10% of their drawn business - more than any other broker in the UK. We know what we are doing.
The commercial team have over 100 years of experience in leisure-based lending, and we are particularly adept at piecing a deal together. Because of our expertise and dedication to the sector, we have been able to position ourselves as industry experts in holiday let mortgages. Our advisers know all lending options available, and we provide peace of mind to our clients that we can finance their dream project. Not only do we complete the transactions in a quick timescale and at the very best rates - but we are fundamentally deal makers and not deal-breakers. I’d recommend speaking to our team about what might be the most suitable option for you.
We now have over 20 lenders offering holiday let mortgages, which between them offer:
· Up to a maximum of 80% loan to value (LTV)
· Rates from 3.25% on a two-year fixed rate, through to 3.39% for a five-year fixed rate at 75% LTV. Two-year discounted deals for either Limited company or personal applications at 60% loan to value start from 2.99% with a £999 fee.*
· Mortgages available to individuals, property holding companies, or trading limited companies (your current business operation).
· Arrangement fees can be added to the loan and are usually between £999 and 2% of the loan agreed.
Because several lenders consider applications from SPV and Trading Limited Companies, it often throws up the question, what entity should I borrow in? Should I borrow as a sole trader, a partnership, a Limited Company or a Limited Liability Partnership (LLP)? I am afraid one answer doesn’t fit all, and every case is different. As I mentioned earlier, you will need to take professional tax advice to find the best solution for you. We have lenders who will lend to all of these entities and we are here to broker your mortgage requirements, whichever path you intend to take.
Whether you are aspiring to own your own holiday home, are looking to diversify your property investment portfolio, or continuing to expand an existing holiday let portfolio, there are lenders out there for all circumstances. You can contact me directly to find the best mortgage for your holiday let, call on 01732 471644 or 07964 916503 or email me at firstname.lastname@example.org.
*Rates as at February 2022.
Originally published October 2019. Updated February 2022
15th February 2022