Everything you need to know to get started
Owning a holiday home is a lifelong dream for many, but turning it into a viable business opportunity requires more than just scouting locations and searching for properties. If you’re considering investing in a holiday rental property, it is essential to understand how to finance it through a specialised holiday let mortgage. Here’s everything you need to know to get started.
Unlike standard residential mortgages, holiday let mortgages cater specifically to properties rented out on a short-term basis to holidaymakers. These typically cannot be covered by buy-to-let mortgages, as they involve different lending criteria. Securing the right mortgage type ensures that your property is financed appropriately, compliant with regulations, and optimised for generating income.
Why you might need a holiday let mortgage
Purchasing a property outright isn’t financially viable for most people, especially in sought-after holiday locations like the Lake District, Cornwall, or the Cotswolds. A holiday let mortgage provides a practical way to invest in a second home that not only serves as a personal retreat but also generates additional income by letting it out to travellers. For instance, a quaint two-bedroom stone cottage in the Cotswolds could rent for as much as £200 a night during peak seasons. This income may help offset mortgage costs while also building equity in the property.
Additionally, holiday rentals may qualify as Furnished Holiday Lets (FHLs) under UK tax rules, which unlock certain benefits. For instance, if your property is available for letting for at least 210 days a year and rented out for a minimum of 105 days, you may be able to offset your mortgage interest against your earnings. You may also qualify for capital allowances on furnishings and other equipment, providing you with further financial leverage.
How to apply for a holiday let mortgage
Obtaining a holiday let mortgage involves several requirements. Deposits are typically higher than those for residential mortgages, often ranging from 25% to 30% of the property’s value. For example, on a £300,000 countryside cottage, you would generally need a deposit of £75,000 to £90,000. This is because lenders perceive holiday lets as higher-risk investments due to fluctuating income and potential vacancy periods.
Lenders will also require evidence of the property’s rental potential. This typically includes projected weekly income during both off-peak and peak tourist seasons. For instance, if a seaside townhouse in Devon is expected to generate £1,500 in weekly income during the summer and £800 weekly in winter, lenders will assess whether the high-season profits offset the lower earnings during quieter months. To strengthen your case, you can present data from local letting agents or industry reports on holiday rental demand in the area.
Key considerations before applying
Managing a holiday rental is not a passive activity, and it’s vital to consider how much responsibility you’re willing to assume. Will you handle bookings, clean after guests, and ensure the property is maintained to a high standard? Or will you hire a holiday lettings agency to manage the workload? While agencies can take care of everything from guest check-ins to marketing, they typically charge between 15% and 25% of your rental income, which affects your overall profitability.
Another vital factor is insurance. Traditional home insurance policies won’t suffice for a holiday rental due to the increased risk of damage related to guests. Instead, you’ll need specialist holiday let insurance, which includes public liability coverage. For instance, it can protect you if a guest is injured on the property, or if damage makes the property uninhabitable during bookings.
Choosing the right location and property
The success of your holiday rental largely depends on the property’s location. Coastal regions like Cornwall, charming tourist hotspots like Bath, and scenic getaways like the Scottish Highlands are all prime destinations. However, conducting market research is crucial. You should explore occupancy rates, peak seasons, and competition in your chosen area.
For example, although a five-bedroom farmhouse in the Yorkshire Dales may seem attractive, factors such as proximity to amenities, demand for large group accommodation, and road accessibility must also be considered.
In addition to location, the property style should resonate with your target market. Unique properties, like converted barns or riverside chalets, often command higher rental income than standard homes. For instance, a converted mill house with scenic views may not only attract families during school holidays but also couples seeking romantic getaways, enabling you to maximise your year-round bookings.
Making your property stand out
The holiday rental market is competitive, so your property must stand out. High-quality furnishings and desirable amenities can significantly enhance both your nightly rate and occupancy. For example, offering features like a private hot tub, an outdoor barbecue area, or dog-friendly accommodations could help you attract more guests and secure excellent reviews. High-speed Wi-Fi and smart TVs are particularly valued by guests seeking both leisure and work-friendly environments.
Equally important is the visual presentation of your property. Professional photography should showcase the space in its best light, while home staging techniques can enhance its appeal. For example, a holiday home advertised with rustic decor, warm lighting, and cosy throw blankets could attract families seeking a winter retreat.
Considering your long-term goals
Setting your goals before buying will shape how you approach your investment. Do you plan to use the property for personal vacations, or do you intend to maximise rental income? Perhaps it’s a combination of both. For instance, if you plan to spend summers at the property, you’ll need a strategy to balance personal use with occupancy requirements to meet FHL criteria.
Finally, holiday lets represent an active investment. Managing guest expectations, maintaining the property, and ensuring it remains competitive in the market requires time and effort. Even if a professional agency oversees the daily logistics, you’ll still need to monitor financial performance and market trends. Ensure you’re prepared for the commitment before embarking on this exciting venture.
Your holiday let mortgage checklist
To simplify your holiday letting adventure, here’s a quick checklist covering all your key steps and considerations:
Financial planning
- Assess your budget and determine how much deposit you’ll need (typically 25% to 30% of the property’s value).
- Research potential rental income for properties in your chosen area and season.
- Calculate additional costs such as legal fees, renovations, furniture, and insurance.
Location research
- Identify high-demand areas, such as coastal, countryside, or tourist hotspots.
- Check for year-round appeal and occupancy potential in your chosen location.
- Consider proximity to key amenities, attractions, and transport links.
Property selection and management
- Choose a unique or desirable property style, such as a converted farmhouse or riverside lodge.
- Decide whether to manage bookings and maintenance yourself or hire an agency.
- Budget for additional management fees if using a letting agency.
Legal and tax considerations
- Confirm that the property meets Furnished Holiday Let (FHL) requirements.
- Investigate tax relief options, such as offsetting mortgage interest and eligible capital allowances.
- Ensure compliance with local safety and health regulations.
Insurance and risk management
- Purchase specialist holiday let insurance, including public liability cover.
- Prepare a plan for handling periods of vacancy or unexpected maintenance requirements.
Marketing and presentation
- Invest in professional photography to highlight the property’s appeal online.
- Offer amenities that attract bookings, such as Wi-Fi, pet-friendly options, or luxury touches.
- Establish an outstanding presence on holiday letting websites and local platforms.
Are you ready to take the next steps?
If you’re ready to turn your dream of owning a holiday rental into reality, speak with our expert team. They will assist you in assessing your options and guide you through the lending process. By taking the first steps today, you’ll be much closer to creating a rewarding and successful venture. Contact Fitch & Fitch at 020 7859 4098 or email info@fitchandfitch.co.uk to discuss your requirements.