Many property investors are considering buying a UK holiday home at a time when mortgage experts forecast a boom in the purchase of ‘staycation’ properties this year.
In 2018, estate agent Savills analysed data which showed that 39% of Britons who bought holiday lets that year chose UK properties. Prior to the financial slowdown in 2017, the figure was 14%. In June 2019, cottages.com reported an increase of 23% in its holiday property portfolio in 12 months.
Leeds Building Society was one of the pioneers of holiday-let mortgage lending in 2013. Demand for their products has grown since then and they experienced around a 10% increase in holiday-let mortgage applications in 2018 compared to 2017, as landlords sought to diversify their portfolios.
Market demand
Brexit, with the accompanying uncertainty regarding changes to passports and customs rules, has contributed to a market where Britons chose the ‘staycation’ option in 2019, rather than venture abroad. These people have joined the enormous influx of international tourists who flock to the UK and benefit from the fall in the value of the pound.
The net result is a huge market of people seeking quality short-term lets for their travels. The market is there for the canny property investor as is the longer-term, more traditional buy-to-let. The difference lies in the way the two sectors are taxed.
Tax differences
Government changes to buy-to-let have seen a gradual reduction in the amount of mortgage interest tax relief that landlords can claim. By 2021, landlords will be able to claim only a flat 20% as a tax credit, compared to the 100% of mortgage interest they were able to claim.
By contrast, with furnished holiday lets (FHLs) landlords can still claim 100% of mortgage interest paid. They can also claim capital allowances on wear and tear and replacement of furniture, while potentially being able to claim capital gains tax (CGT) relief as a business.
HMRC rules require the property to be available to let for a minimum of 210 days and be let for at least 105 days in order to qualify for mortgage tax relief. Furthermore, as many landlords are keen to use property as a savings vehicle for their future pensions, income from FHLs can also be invested in a pension where tax relief may be available.
Yields
Yields on holiday lets can out-perform more traditional forms of buy-to-let, subject, of course, to circumstances.
Data from holiday property fund, Second Estates, showed that in 2018 landlords with holiday homes in Wales were able to achieve yields of 11.7% over a 12-month period. Northumberland came next with yields of 11.5% while the national average was 10.3%.
Yields will be dependent on a number of factors, among them property value, the going rate for rent and the number of bookings, which also relates to demand in the area. Second Estates predicts further growth in holiday let yields over the period from 2018 to 2022.
An average return of 14% is forecast across the UK, with the North-West and East of England set to achieve yields of around 16%.
Mortgage rates
There has been an increase in the number of lenders offering holiday buy-to-let mortgages over the last few years. Rates start from 2.44% for a two-year fix or 2.75% for a five -year fix. These rates are at 60% loan-to-value, although most lenders will expect a minimum 25% deposit.
The holiday lets market continues to do well and attract interest from investors. There is no doubt that circumstances have contributed to the present situation, forcing many BTL landlords who feel the effects of government changes to look to new, resourceful ways of achieving a profit.
A specialist broker can help to summarise each lender’s criteria regarding holiday lets and what will be expected from the borrower. Running a holiday let can be hard work, but the statistics demonstrate the potential rewards.
