Unless you are buying a holiday home for family and friends to use, you will need to keep a cool head to run it like a business. Below are a few points to bear in mind before you take the plunge.
What is the best way to finance a holiday home?
Unless you have the funds to buy your investment property outright, you will need to arrange a specialist mortgage for a holiday home you plan to rent out. Lenders consider a holiday home that involves short-term stays, where there may be times of the year when it is not let out, to be a higher risk than a buy-to-let property.
As holiday let mortgages are only available from a few lenders, consider hiring a mortgage broker to find you the best deal. They can also arrange for you to switch to a new lender if you plan to re-mortgage your home to raise some of the funds.
This can be complicated because the lender mortgaging your main home may refuse to mortgage a holiday home; you may have to give up a low-interest deal, or there could be exit fees to pay to switch lenders.
Expect the interest rate on your holiday let loan to be higher than for a standard or buy-to-let mortgage and the deposit to be larger – lenders expect a deposit of at least 25% of the property’s value.
The amount you can borrow will depend on the projected annual net rental income or the actual income if you already own a holiday home, plus details of how the new property fits into your plans. You will need a separate income of between £20,000 and £40,000 a year to show that you can afford mortgage repayments when the property is unoccupied.
Once you have found a property, you can ask the estate agent or a letting agent who knows the short-let market in the area to provide a rental income projection.
Cumberland Building Society, for example, requires that the annual net rental income (assumed at 80% of the gross figure) must be a minimum of 125% of the annual mortgage interest you pay. You will also need cash savings of £15,000, sometimes more, after the mortgage has completed.
Are there any concessions for owners of holiday homes?
Government tax rules for furnished holiday homes that are commercially let are more favourable than for buy-to-let properties.
Running a holiday let is treated as a business, so (in the 2021/22 tax year) you can claim capital allowances for items such as furniture, fixings, and equipment.
You can also claim tax relief on any mortgage interest you pay, deducting it from your rental income before calculating your taxable profits.
Business expenses include the cost of repairs and maintenance, such as fixing a burst pipe, and there are tax reliefs when you sell up. It all depends on how often you rent out your holiday home – for more information, visit Gov.uk.
Good places to buy in the UK
With foreign holiday plans put on hold for many of us, demand has soared for seaside and country homes in the UK.
Earlier this year, Cornwall replaced London as the most searched-for place on Rightmove, with the town of Newquay taking the hot spot with eight out of 10 properties in 2021 already sold subject to contract. Interest in beachside homes in Carbis Bay, near St Ives, also surged when the UK hosted this year’s G7 Summit in June.
Other coastal locations that have sparked interest are the Sussex towns of West Wittering and Camber, along with Plymstock, in Devon, and Canvey Island in Essex.
The counties of Norfolk and Dorset are also popular with buyers, while for a rural retreat, the village of Melksham, in Wiltshire, on the banks of the River Avon, was the tenth most searched-for place on Rightmove.
What features should I include to maximise my returns?
The much-used cliché location, location, location still holds when it comes to making money on a holiday home. While you will have to act fast to secure a property in a sought-after location, it will be easier to find paying guests and to sell further down the line.
Think about the type of guests your holiday home would attract, so you can tailor your home to suit them.
Don’t skimp on good-quality furniture and furnishings – the British weather is so unpredictable, guests will want a comfy sofa and a good night’s sleep.
To prolong the season once summer is over, consider adding focal features such as a log fire indoors or a firepit on the patio. Don’t forget a good wi-fi connection now that more people are working remotely or like to stream their favourite shows, and guests will appreciate off-street parking.
If you are looking for year-round guests, check how other holiday rentals plan their pricing policy – offering a cheaper day rate from Monday to Friday, or during the low season, could pay off in the long run.
Hannah is a freelance financial journalist. She has written on topics including consumer rights, personal finance, homes and property for magazines, newspapers and websites including DIYgarden.co.uk, Ocean Finance, Moneywise, and The Daily Telegraph. In her spare time, she grows her own veg, plays bridge and looks at ways to save money on her household bills.