According to figures from consumer research company, Consumer Intelligence, 42% of UK holidaymakers chose to holiday at home last summer, with 34% planning to holiday at home at least twice in 2024.
Many people like the idea of owning a holiday home, where they can earn an income from renting it out and use it themselves too. This area of the market can prove an attractive proposition for borrowers looking to capitalise on the demand for staycations in the UK.
However, unlike typical BTL properties, holiday lets are rented by guests for short periods of time. This can range from a few days up to a week and is generally a much more seasonal area of the private rental sector.
With the seasonal fluctuations comes more complexity and some financial risk – the mortgage repayments are not going to fluctuate depending upon the holiday let demand but are fixed or variable depending on the lender’s product terms.
Responding to the different income patterns
The Interest Rate Coverage Ratio (ICR) for BTL is a necessary method of assessing a landlords ability to make repayments and, at Mansfield, we believe that this also needs to be considerate to the quirks of holiday lets.
For holiday lets, we consider the variable rental income to assess affordability and we calculate this using an annual average of the low, mid and high season rental figures for the property after the agent’s letting fees have been deducted.
To determine whether the income can cover the monthly mortgage payments, we then calculate the estimated monthly income based on 70% of the annual average, which allows for any potential rental voids.
As well as being considerate of the seasonal income, the other major contributing factor to supporting affordability is, of course, the rates available. Holiday let landlords have not been immune from the recent rate rises that have affected all borrowers and product availability can be limited.
Limited company holiday lets don’t have to be limited
The nature of holiday lets and BTL tax rules in general mean there are some strong reasons for holding a holiday let through a limited company.
A limited company can account for multiple applicants, can limit the liability if things go wrong and can offer tax efficiencies, particularly if there are higher rate taxpayers involved.
Whilst not all BTL lenders will consider holiday lets, even fewer will consider limited company holiday lets. Yet at Mansfield, we still see ‘can do’ amongst the complexity.
As interest rates have stabilised, we have recently reduced the rate on our SPV Ltd Company Holiday Let mortgage to offer further relief in addition to the accommodating way we assess the ICR.
Given the complexity and unique nature of holiday let mortgages, being well-versed in the regulations, seasonal variations in rental income and the tax implications of owning a holiday let is crucial.
