Is it worth swapping a buy-to-let for a holiday let?

As foreign travel is curbed and staycations become more popular many investors are eyeing holiday lets as a potentially lucrative safe haven for their cash.

Fears of snap travel bans and quarantine rules have led to a boom in UK tourism as holidaymakers flock to Britain’s rural hotspots and beachfronts.

This has led to a surge in bookings for holiday lets up and down the country, according to estate agents. 

On top of the surge in demand,  more generous tax perks for holiday lets might be tempting landlords who are struggling to make a profit from buy-to-let. 

But is it worth making the swap if you already own a buy-to-let? We take a look.

How do I make a holiday let pay for itself?

Spend some time scouring holiday let websites and the returns at first glance look appealing. A three-bedroom holiday cottage in popular Scarborough can generate up to £1,432 a week according to search engine Holidaylettings.

However, a terrace with the same number of bedrooms available on the traditional rental market rents for just £650 a month, according to a listing on Rightmove. 

This bumper income can make a holiday let pay its way but might only be expected in peak seasons like August and Christmas.

However, the extra upkeep and management involved makes holiday lets much more costly to run than the average buy-to-let. And depending on where your holiday let is you may find that outside of the most popular months, it could prove difficult to rent.

That might mean that targetting an all-year round area, such as the Cotswolds or Peak District might prove a better investment than a seaside town that’s rammed in summer and quiet the rest of the year. 

Holiday lets also involve much more work. At the end of every long weekend, week or fortnight, it’s changeover day and time for cleaning and making it ready for the next guests.

If you’re too busy to do it yourself, you can employ an agent to manage bookings and customer service. Firms typically charge between 15 and 20 per cent.

Buying local will expose you to house price fluctuation on two properties rather than one

However, management of the property, which includes cleaning and repairs, still usually falls to the owner. As many people will not want to do the changeover work themselves, you will need to find reliable cleaners and potentially a trusted local person to act as your agent on that day and to be a point of contact for urgent problems.

The reward for the extra hassle is a much improved rental yield – the rental return as a percentage of the property purchase price.

But there will be long periods where the property sits empty and you may still have to cover the cost of a mortgage.

There are also extra costs like cleaning and laundry charges to consider.

For a two-bed holiday cottage, property management companies typically charge about £50 to clean the cottage, according to Schofields Insurance.

The average cost of laundry can come in at around £35 per booking, dependent on the number of items.

On top of this, you will also need to pay for insurance, as well as general property maintenance like gardening. 

All of these costs add up, so pick an area where you can expect a decent yield – local agents will be able to help give you a more accurate picture of what to expect. 

Sykes Holiday Cottages has a calculator which can give an estimate of how much different sized holiday lets earn around the country. 

More and more investors are eyeing holiday lets as a potential safe haven for their cash

Can I get a holiday let mortgage? 

If you’re considering investing in a holiday let and don’t have the cash to buy outright, you’re going to need to first think about securing a loan. 

Because it’s difficult to tell how often a holiday let will be occupied throughout the year, getting banks to finance one is more complicated than a traditional buy-to-let.

You’ll likely need to use a specialist mortgage product, probably from a small building society, each of which will have their own lending terms. 

Some won’t allow owners to use the property for their own holidays for example, while others won’t lend on homes used for Airbnb.

As income will fluctuate, the lender will set the loan based on income projection figures instead of a multiple of potential rental income as they would with buy-to-let. 

The lender will also look at your own earnings to find out whether you’ll be able to cover the mortgage while the property sits empty. 

There are currently 39 mortgages that can be used on holiday lets, ranging from 60 per cent to 80 per cent loan-to-value, according to finance experts Moneyfacts. 

Currently Cumberland, Furness, Leeds, Vernon, Melton, Mansfield, Monmouthshire, Principality, Scottish, and Yorkshire building societies offer these deals.  

The cheapest deal currently on the market is a two-year discounted variable mortgage from Cumberland Building Society at 2.59 per cent for those with a 40 per cent deposit. 

The cheapest fixed rate, also from Cumberland, is a two-year fix at 2.69 per cent at 60 per cent loan-to-value.

On a £300,000 holiday let, a 40 per cent deposit would amount to £120,000 and over the initial two years at 2.69 per cent monthly payments on a 25 year mortgage would amount to £825 on a repayment basis and £403.50 interest-only.

These deals change weekly, so speaking to a mortgage broker could help you find the right product for your circumstances.

You’ll pay less tax on a holiday let 

Holiday lets are subject to a different tax structure than buy-to-lets#, which could make them more attractive to landlords. 

For example, buy-to-let investors are no longer able to deduct all the interest they pay on their mortgage from the rental income they declare to the taxman.

Instead they can claim a 20 per cent mortgage interest tax credit. This leaves higher earners worse off than they were in years past.

But holiday lets are different. As long as HMRC classes the property as a ‘Furnished Holiday Let’, then investors can still deduct the cost of their mortgage from their profits before calculating how much income tax to pay.

In order to qualify the home must be available to let for at least 210 days and lettings must be in place for 105 days.

If you’re planning on using the property yourself, you can use the remaining 155 days. 

Holiday lets are taxed differently to buy-to-lets which could make them more attractive

You’ll still have to pay a 3 per cent stamp duty surcharge as a second homeowner, but if you buy during the Government’s stamp duty holiday then you could save thousands of pounds.

For example as illustrated in the chart below a £400,000 second home will now only carry a stamp duty bill of £12,000 rather than £22,000.

While this is still £12,000 more than a standard house purchase due to the 3 per cent surcharge, the investor will still now save £10,000, the same as a standard home buyer would by not paying any tax at all.

Holiday lets also have a lower rate of capital gains tax at 10 per cent, compared to 28 per cent and 18 per cent for higher and basic rate taxpayers for buy-to-let property.  

There are advantages and disadvantages to investing as an individual, through a limited company or trading limited company. 

Speak to an independent adviser if you are unsure which is best for your circumstances. 

Where should you buy?

A lot of the same rules apply when buying a holiday let as when investing in a buy-to-let. 

Investing in property involves committing tens of thousands of pounds, as well as a lot of time and effort, and is not something to be taken likely. 

Where are the holiday let hot spots? 

Since the housing market reopened in May, some areas have seen a staggering amount of holiday let investment.

Some 44 per cent of all lets bought in Scarborough for example were short term holiday lets, according to estate agents Hamptons International, and nearly a third of all Ceredigion lets in Wales were bought as holiday lets.

Meanwhile, the cities of Cambridge, Dover, Chirstchurch and the City of London all dropped out of the top 10 from last year.  

As with all property, when house prices rise you can make big leveraged gains above your mortgage debt, but when they fall your deposit gets hit and the mortgage stays the same.

You also run the ever present risk of damage done to the property by guests – though there are different insurance products that can protect against this. 

Finding the right area to buy in is obviously essential. Depending on your budget, this will mean balancing the cost of the up-front investment with the returns you could find in the area.  

In most cases people tend to invest in property close to where they live. 

They are likely to know this market better and can spot the kind of property and location that will do well. They also have a much better chance of keeping tabs on the property.

But for a holiday let, local may not work unless you live close to a popular place to visit. Even then, if you plan to use the property yourself you probably want to go further afield than just down the road. 

One idea is to look within a radius that combines not too far away, with far enough away and desireable. For example, consider places no more than two-and-a-half hour’s drive. This means you’ll be able to use the property yourself more often.  

It’s also worth bearing in mind that if you are a homeowner then you are already exposed to house price fluctuation where you live – so looking for a different type of home in a different area might be a good move.  

Has the pain in Spain killed off summer holidays this year? 

After a great deal of fuss about air bridges and people being able to go on summer holiday, things suddenly changed.

A swift about turn saw a 14 day quarantine period imposed for those arriving in the UK from Spain at just hours’ notice, hitting tens of thousands of holidaymakers who are there already, those with trips booked and leaving Britons hoping for some Spanish sunshine stuck in travel limbo… again.

Are holidays to Spain off the cards for some time, and can you go to France, Italy, Greece or anywhere else safe in the knowledge you can come home and not have to take an extra fortnight off work?

On this podcast Georgie Frost – in Spain and facing a 14 day quarantine if she can get back – is joined by Simon Lambert and Grace Gausden to talk holidays, travel insurance, refunds, air bridges and whether even a staycation is safe. 

 Press play above or listen (and please subscribe if you like the podcast) at Apple Podcasts, Acast, Spotify and Audioboom or visit our This is Money Podcast page.  

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