With the UK holiday let industry looking at another busy year, could you be minimising your profits by paying too much on your holiday let mortgage?
We’ve written frequently over the last two years about the booming UK holiday let market and the many benefits the sector offers property investors. International travel restrictions during the pandemic led to record numbers of us booking holidays closer to home, reigniting our love for trips within the UK.
Larger properties in holiday hotspots, particularly near the coast, earned their owners significant yields, often in the region of 8-12%, plus considerable capital appreciation; a property investor’s dream, you might say.
Now facing a cost-of-living crisis, many of us once again face restricted holiday options, and experts expect many of us will opt for UK breaks to keep costs down. Good news for holiday let investors!
When the holiday let market started booming in 2020, mortgage interest rates were lower. To maximise profits, many investors took discounted variables that tracked lender standard variable rates (SVRs). Particularly popular were those lenders (mainly building societies) that used projected holiday let income to calculate affordability rather than standard assured shorthold tenancy (AST) letting income.
A five-bedroom Cornish property valued at £650,000 could achieve a gross annual holiday let income of c£65,000.
If the property was let as a standard buy to let property on an AST, that income could reduce to c£25,000.
More cautious lenders will base affordability on the latter figure, which restricts how much you can borrow. Those lenders more comfortable with holiday letting will base calculations on the larger holiday income figure, allowing investors to borrow more and purchase higher-value properties.
You’ll undoubtedly be aware that mortgage interest rates have increased significantly in the last year. Consequently, lenders have increased SVRs. Where those discounted variable mortgages may have initially been in the region of c3.5%, some may now be from 6.5% to 7% - quite an increase! These higher interest rates mean lower yields and higher monthly interest repayments, which most property investors are keen to avoid.
According to Moneyfacts, holiday-let mortgage options have doubled since October 2022, and more lenders are in the market. Consequently, competition is rife, and many lenders are adjusting their pricing for this sector to attract new borrowers.
How Much Could Holiday Let Landlords Save?
According to our calculations, some borrowers could be looking at an interest rate saving of c2.5% on holiday let borrowing. Even for those still within early repayment charge (ERC) periods, it may be financially beneficial to break your existing mortgage early for a new rate.
Moneyfacts finance expert Rachel Springall commented that “rising interest rates may well dent the profit margins of investors during 2023, [...] it’s imperative prospective landlords seek advice to compare options.”
In 2020 you took an £800,000 holiday let mortgage on a discounted variable rate. The interest rate is now 6.64%, equating to £53,120 in interest payments per annum, or £4,426 a month.
You still have an ERC of 0.5%, which would be £4,000.
You could potentially secure a new discounted rate from 4.34%, reducing the interest to £34,720 per annum and £2,893 a month. Even with the £4,000 ERC penalty, you’re looking at £1,533 a month saving!*
To make the most of the 2023 holiday season and maximise profits, we strongly recommend you review your holiday let mortgage finance as soon as possible. Our experts can crunch the numbers and search the whole mortgage market to ensure you’ve made the most suitable financial choice. Call us today on 0345 345 6788, or submit an enquiry.
*All rates as at January 2023 and subject to individual circumstances.
25th January 2023