The UK staycation market has boomed over the last few years, with tourism data showing 57 million domestic overnight trips were taken in the UK in 2023. With the average trip length 3-4 nights, a self-catering holiday home is an obvious choice. Holiday homes can provide a regular income and have special tax advantages, provided they are rented out as furnished holiday lettings (FHLs).
So what do you need to know about financing a holiday home in a hotspot like North Yorkshire?
- How holiday let mortgages work
- Tax implications of a holiday let
- Holiday-let mortgage lending criteria
Buy-to-let vs holiday let mortgages
To qualify as a furnished holiday let (FHL) for tax purposes, HM Revenue & Customs says that your property must be available to let for a minimum of 210 days each year and that it must actually be let out for at least 105 days a year. Each booking must be short-term, letting for no longer than 30 days at a time (longer continuous stays are not counted towards the 105 letting days a year). Lettings to friends or relatives at zero or reduced rates will not be included either.
The main tax advantage of holiday let mortgages is that you can still deduct interest payments as an allowable expense on their tax returns against rental profits, which is no longer possible for “buy-to-let landlords”. This makes furnished holiday lets an appealing alternative, though the government is consulting on changes to this legislation from April 2025.
Apart from the financial benefits, you can also stay in the holiday home yourself outside the period of 210 days when it must be available to let; an opportunity not available with a buy-to-let.
What are the tax implications of a holiday let?
- If you rent out furnished holiday accommodation, HMRC says you can claim capital gains tax relief as a trading business, including entrepreneurs’ relief or Business Asset Disposal Relief, when you sell.
- Owners are also eligible for allowances for furniture, equipment, fixtures and fittings – and if your business makes a loss, you can offset it against profits in future years ensuring an owner pays less tax.
- Mortgage interest can be offset against rental profits.
- Profits from the business are also counted as earnings for pension purposes.
- Consideration should be given to the VAT threshold of £90,000 of revenue per year.
A holiday home owner should note that these FHL rules will change from April 2025, with more information available on HMRC website. A property owned through a limited company or other business structure is subject to different rules.
Holiday Let Mortgage Criteria
With a limited number of providers offering mortgages for holiday lets, it can be hard to pin down strict lending criteria. Here are the main points to consider:
- Loan to value: Lenders tend to set a maximum loan-to-value (LTV) ratio of 70% – and a lower LTV may get you a better interest rate. You will usually need a deposit of at least 30%.
- Mortgage amounts: Typically, these range from a low of £25,000 to a high of £750,000, although it can go up to £1.5m.
- Minimum income: Lenders usually require a minimum income of between £20,000 and £40,000
- Rental income: Lenders usually expect borrowers to provide a revenue projection. Generally, you must be able to make a gross (pre-tax) rental income of 125%-145% of the monthly mortgage repayments when calculated at a 5.5% interest rate.
- Personal situation: Most lenders require you already own your own home and are over 21 years of age.
- Main residence: Holiday-let mortgages can’t be for a main residence, or somewhere the applicant has previously used as their main residence.
- Portfolio limit: Some lenders limit the number of holiday lets you can own and rent out at once. However, if you own other properties, you may be able to use them as collateral.
Is a holiday-let mortgage more expensive?
Mortgages for holiday lets generally require larger deposits upfront than residential mortgages. You should expect interest rates to be slightly higher than for buy-to-let property or residential mortgages. This is because:
- It is a niche finance product with fewer providers on the market
- This can be a seasonal business where income may be irregular and limited to peak times of the year, posing more of a risk for the lender.
The best holiday-let mortgage lenders tend to be smaller building societies, offering deals on 2-year or 5-year fixed rates. Although variable rates and those from high street banks can be found. It is worth spending time searching the web to compare rates, and holiday let mortgage broker can be a great asset to help find the right deal.
As of late 2024, some holiday let mortgages have initial interest rates as low as 4.35% for a two-year fixed rate. However, the average rate is between 5%-6%.
