Wish you were here? How the perfect holiday home could earn you three times more income than a buy-to-let
- Holiday homes are not subject to buy-to-let tax relief crackdown
- Yields can be much higher - but so can the costs
Holiday home landlords who own property in sought-after locations can earn up to three times the annual income of a buy-to-let investor, according to specialist broker Holiday Let Mortgages.
The bumper income is the result of the staggering weekly rental rates holiday homes can command during high season - the school holidays, particularly summer, Christmas and New Year - which inflates the annual total and offsets periods when the property sits empty.
Yet investors tempted to make the leap into the holiday lettings market need to carefully weigh up the extra costs and work involved, over and above a typical buy-to-let.
The perfect getaway: Holiday homes in sought-after locations, such as Port Isaac in Cornwall, can make a small fortune for their owners
A four-bedroom holiday cottage in the picturesque market town of Kirkby Lonsdale currently being advertised at holidaylettings.co.uk can generate £2,900 a week in high season.
However, a maisonette with the same number of bedrooms available on the traditional rental market rents for just £695 a month, according to a listing on Rightmove.
The reason for the disparity is simple, says Holiday Let Mortgages director Norman Phillips. ‘People want to go on holiday to nice places – well-located, high-spec properties that are decorated and furnished to high standards.
'And they are prepared to pay accordingly.’
However, the extra upkeep and management involved makes holiday lets much more costly to run than the average buy-to-let.
As an example, it’s not uncommon for a letting agent to charge 20 to 30 per cent plus VAT of each holiday rental for full management, says Phillips. The standard cost quoted for buy-to-let landlords is typically 12.5 per cent plus VAT.
The reward for the extra hassle is a much improved rental yield – the rental return as a percentage of the property purchase price.
While, BTL investors are commonly advised to aim for a yield of around 6 per cent, Phillips says a holiday let could yield more.
Another factor adding to the longer-term appeal of holiday home investment is that it is excluded from a change in the rules that will reduce the amount of tax relief buy-to-let investors can claim.
Karen Barrett, chief executive of Unbiased.co.uk, which connects consumers with financial advisers, explains: 'Up to now, people buying to let have been able to claim tax relief on their mortgage interest payments at their marginal rate of tax.
'This means that a basic-rate taxpayer would get 20 per cent tax relief, but those at a higher rate would receive 40 per cent relief, while top-rate taxpayers could claim 45 per cent. When the changes come in [from April 2017], tax relief will be a flat rate of 20 per cent.'
She adds: 'Buy-to-let landlords who pay basic-rate tax would see no change, but those on higher incomes will find themselves losing much more in mortgage interest payments.'
Unbiased points to analysis from the Nationwide Building Society to show how much affected landlords could lose out.
It estimated a landlord paying higher-rate tax with a £150,000 buy-to-let mortgage on a property worth £200,000, with a monthly rent of £800, would currently have a net profit of around £2,160 a year. But under the new system, the net profit would plunge to £960.
Must haves: here's what holidaymakers want from a property and how much more they'll pay for it
How to fund a holiday let investment
There are various ways to fund a holiday home. If you're not lucky enough to be able to afford a cash purchase, specialist mortgages are available from a range of lenders, including local building societies.
But borrowers will find that their opportunities are more limited than traditional buy-to-let mortgages. However buy-to-let mortgages are not available to those purchasing holiday homes because of the likelihood of void periods, which buy-to-let lenders would steer away from.
'The minimum deposit is 25 per cent and while some fixed-rate deals are available, most loans are variable rates,' says Norman Phillips.
LOCATIONS IN HOT DEMAND
Cornwall cottages are some of the most-sought after summer holiday homes in the UK, with the last week of the school holidays (21 to 28 August) the most popular this year, according to holidaycottages.co.uk.
The website saw a 20 per cent uptick in bookings for the region this year compared to last, as holidaymakers followed David and Samantha Cameron's example and headed south west.
Cornwall is actually the holiday home hotspot of England and Wales in 2015, with 10,169, or 6.2 per cent, of all properties used for this purpose, according to Direct Line.
Gwynedd (home to Snowdonia), North Norfolk, South Lakeland and East Lindsey make up the rest of the top five locations for holiday homes.
He says the best rate his brokerage can currently access is a 2.1 per cent variable but is only available to borrowers with a 40 per cent deposit. But, he adds that anything under 4 per cent is competitive for borrowers with the minimum 25 per cent deposit.
He points out that one major difference between a holiday home and a buy-to-let mortgage is how the maximum loan size is calculated against rental income.
'With a buy-to-let mortgage it is the lender’s valuer that will visit the property and assess how much rent the property can achieve based on an assured shorthold tenancy agreement.
'This method is not suitable for a holiday let as the potential holiday let income could be, as much as three or four times higher, the valuer would not be able to confirm this.
'A specialist holiday let mortgage lender will recognise this and so will accept confirmation of the potential income from a holiday lettings agency by way of an income projection.'
Landlords don't generally have to pay for such projections as the agent will hope to earn fees through letting and managing the property.
Can I just use a normal mortgage or buy-to-let?
Phillips also warns of the dangers of trying to cheat the system by using a buy-to-let or second residential mortgage, which usually ban borrowers from letting the property as a holiday home, to fund a holiday home purchase.
Should the worst happen and you need to make a claim on your insurance, if the loss adjuster who will come out to investigate gets wind of your bending the rules, they will have grounds to dismiss your claim.
'Don't cheat thy system,' he says. 'Your comeuppance could cost you everything.'
What to watch out for
When buying a holiday home, make sure that you understand what holidaymakers are likely to look for. The graphic above shows some of the key priorities - including hot tub, wifi and being dog-friendly. The priorities of holidaymakers are likely to be different to those looking to rent over the longer term.
Also bear in mind that you may have to cover your mortgage costs at times when you have no rental income.
If you plan to holiday in your investment property yourself, just remember if you go at times of peak demand you'll be doing yourself out of precious extra income.
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