The UK's premier broker for holiday let mortgages May 2016 An introduction to Holiday Let Mortgages Holiday let property finance is a small and highly specialised market, and unlike mortgages for buy to let properties, they are not widely available. A Holiday Let Mortgage is different from a Buy to Let Mortgage, due to the type of occupancy. Today many Holiday Let property purchases can be funded, with a special Holiday Let Mortgage, provided by one of several Building Societies. The terms are very favourable, non commercial rates! A sho rt g uide to Holiday Let Mortgages We do hope that you pick up a few hints and tips from our guide. It is not designed to be exhaustive, but if it helps to put you on the right path, then our Guide to Holiday Let Mortgages has fulfilled its purpose. As with any property investment decision, it is important to do your homework, and research the subject thoroughly. Go to the places you want to invest in and talk to the local Estate and Letting agents. Ask, ask, ask, is the mantra. The case studies inside are real clients we have helped over the last few years. We are more than happy to discuss your options even if you do not yet have a property in mind so please get in touch on 0800 840 3111 As UK's premier broker for holiday let mortgages, we know the lenders that like to say yes! We also have Holiday Let products available to British Ex Pats, including those that are selfemployed.
Investment in residential property has However, there is an alternative to So what has got the journalists so hot grown at a tremendous rate over the buy to let property investment. This under the collar? last few years, mainly due to buy to let market has more facets to it, and investment. potentially a greater number of Is it purely the investment potential? Growth in this sector has been very emotional drivers. strong, fuelled by the combination of Maybe it is the chance to buy your innovative buy to let finance, the Just pick up the property section of retirement home now at today's Assured Shorthold Tenancy and the British love affair with property ownership. Multiple property any good Sunday newspaper and it is likely there will be an article extolling the benefits of owning a holiday let price, and have it part funded by someone else? ownership is now within the reach of property or furnished holiday let Is it the draw of using your own most home owners. (FHL). holiday home, at a very low personal cost? Investment Potential All the benefits of buy to let investment such as capital growth and tangible security, however with possibly less risk? After all the holidaymakers pay for the holiday rental in advance and of course the legal landlord-tenant relationship, as created by an Assured Shorthold Tenancy (AST); does not exist. Retirement Over the course of our lives, many of us visit areas of the UK and such places can end up holding a special place in our hearts. Could it be the advantageous tax position enjoyed by the Furnished Holiday Let sector? The answer, of course, is all of the above. If the price of the retirement property increases at a faster rate than the main residence then the possibility of a shortfall in funds increases. Let s look at this another way? How often have you heard a friend say they would love to retire to the seaside or an idyllic cottage in the country? Places where they have enjoyed many a holiday over the years. Many people do indeed move to their dream home in that special part of the country, but their finances dictate that they have to wait until they actually retire. The downside with waiting is house price inflation. In the twenty or so years that elapse until the idea comes to fruition, property prices will soar! But this also means that the main residence would also rise considerably in value so most people would simply sell up and then purchase their retirement home. Relying on this strategy is risky, as retirement properties in good locations are much sought after, and demand is pushing prices up even further. What about the possibility that you could purchase your dream retirement home now, at today's prices and then rent it out so that the furnished holiday let rental income you receive pays for all or the best part of ownership? You could also use it for the occasional holiday and so save on the money you would have spent renting out a UK holiday home each year. Your main residence will continue to enjoy property price growth. So, when the time comes to sell, it should cover the holiday home loan with money to spare. Welcome to holiday home ownership with a holiday let mortgage.
How to improve desirability! Most holiday lets will be rented by families so your property needs to be suitable for this market. However, there are ways to improve the desirability of your property and therefore your potential income. Where to buy and what to buy Think like a guest and don't put your potential customers off by choosing a property which isn't practical for their needs What amenities would they like to have? Some of the following may give your property the edge: proximity to beach, a swimming pool nearby, a sea view, quiet location, private garden, child friendly, always parking facilities. Think about turning up at a Holiday Let, where there was parking issue; no parking, or restricted parking, would you return? We have all seen the TV programmes with two Estate Agents giving us their philosophy on where to purchase a property that will increase in value, disproportionate to the wider market. They make it look so easy, as it always is when playing with someone else's money! However, their guiding principle of "location, location, location", although a little corny, is backed by the logic and reason of simple economics - that of supply and demand. Location Location The final decision on location will Depend on you. Do you eventually intend to live in the property? This may well be the driving factor, with maximum seasonal rental yield a close second. If high rental income is going to be a priority then you will need to choose your property location well. A property linked to outdoor life, such as in the " Lakes", with a 42 week plus season, would produce a far better return, than a property liked to the coast. There are no shortcuts to research. If you do the homework thoroughly, you will find the best place to suit your individual aim. We find that most clients are buying in established holiday resorts and areas. Places such as Devon, Cornwall, the Lake District, the New Forest as well as Norfolk, Suffolk and parts of the Yorkshire coastline. Our guide to the purchase of a holiday let property does not purport to be some kind of Holy Grail, it s simply a guide. It is not exhaustive. The message is an attempt to focus your thought process around the principle of "location, location, utility". When considering buy to let, we know to look for demand. The same is true of Holiday Let property investment, however the demand takes a different form. Ask yourself, if we were holidaying at this location, what would be our needs for a memorable vacation? Scotland is also a popular choice for Owning a holiday let property. Use the internet and see where the popular holiday let areas are. Speak with the agents and ask about occupancy and the length of the holiday season, if max income is important. As discussed some areas such as those linked to walking, or sailing, have longer seasons than those connected to the coast. However, your purchasing choice will always be a balance between, heart and head! This is not meant to be a complete list but merely things to consider. Property with some or all of the above features will command more rent and more profit for you. You will secure this extra income when you buy your holiday let property so do your homework and compare the alternatives. Star Ratings System for self-catering accommodation You could choose to have your property assessed by Visit Britain under their National Quality Assurance Standards (NQAS). The higher quality your property the more stars (Max 5) you will be given and this will then enable you to charge more than an unrated property. This is an annual assessment to ensure the property is kept in good order. NQAS costs around 200 for the first visit but you should get this back in higher rental income.
Costs of a Holiday Let Property Ownership. The types of costs involved in owning a holiday let property are not so different from your own home. Unlike a buy to let tenancy, your holiday guests will not be expected to pay the council tax or any utilities, you will. So a careful cash flow analysis; may be required before you dive in. Simply, are you happy that you can afford the running costs of this property? A large proportion of your rental income will be taken by the holiday letting agent, if you choose to use one. Full management rates of 20-30% are not uncommon. However, these fees do not always cover laundry, cleaning, disposing of rubbish and gardening. So negotiate well and make sure every angle is covered. If you choose to finance the purchase with a mortgage (and we hope you do!), then this may well be the largest regular financial commitment. We can help you to understand your future cash flow; by calculating what the payments might be if interest rates change. Don't forget to budget for the initial cost of furnishing your property. If you decide to go for the NQAS Star Rating then you need good quality furniture and furnishings that will last and take the odd knock or two. You may like to read our Tax Tips section for a more detailed analysis of taxation of income and capital gains. Don't forget as you are running a holiday let business you need to keep good financial records for your Tax Return. Let Property Insurance You need to ensure that your property and your guests are adequately insured. You need to ensure that your property and your guests are adequately insured, but obtaining suitable insurance for your holiday cottage or second home is very different to a normal domestic home insurance policy. In fact, the type of policy required to cover a Holiday Let Property contains business elements, such as Public and Employers liability. A standard home buildings and contents policy, will simply not pay a claim, should the need arise. This is due to issues surrounding the need to satisfy, various clauses, relating to occupancy. Purchase of the correct type of insurance contract, to cover your property, is essential; and we recommend that you take the time to speak to an expert broker. Costs Here are some costs you should budget for, although they may not apply to every property: Initial purchase costs Decorating and furnishing Mortgage fees and monthly payments Property insurance Council Tax Management fees (plus VAT) Cleaning, rubbish disposal, gardening Utility bills Service costs TV licence Ground rent Repairs and replacements Cashflow We find that some holiday let properties simply do not pay for themselves on a cash flow basis. This means that the rental income does not cover all of the running expenses. For most of our clients this does not pose a problem as they are happy to fund the extra money required from their own income. Many see this as an alternative 'savings plan' as the property will be increasing in value and the overall net cost of ownership is relatively small.
Mortgage criteria This is a guide to some of the basic holiday let mortgage lending criteria. Loan to value (LTV): Typically, lenders will offer between 60%-75% of the property value. Rental cover: The rent needs to cover the mortgage payments by 20-50% UK holiday let mortgages We would like to begin by explaining that a holiday let (or furnished holiday let) is not the same as a buy to let. Although both are let properties, the buy to let will be let on an Assured Shorthold Tenancy (AST) agreement and the holiday let will be let to holidaymakers for a few weeks at a time throughout the year. One major difference is how the maximum loan size is calculated. Deposit - All holiday let mortgages require a reasonable size of deposit. If this is not readily available from savings or investments, then it may be possible to capital raise the required funds on the main residence. 100% - Although no 100% holiday let mortgage is available, we can offer loans secured on more than one property, i.e. other investment properties. Contact us to discuss. With a buy to let mortgage it is the lender's valuer that will visit the property and comment how much rent the property can achieve based on a sole AST. 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. Refurbishment - Straightforward holiday let mortgages require the property to be sound and habitable and rent producing at outset. However, we have bespoke schemes available to cover refurbishments, where the applicant intends to retain the property. Poor credit - Generally this is not acceptable. Minimum income: 20-40,000pa provable UK Exceptions can be made. Repayment type: Capital & interest, interest only, and Part and Part. Owner Occupier: Generally; however exceptions av a i la b le. Property type: Most property types can be accommodated. Ex Pats: Available on a special bespoke basis. Location: England, N. Ireland, Wales & Scotland The finance you require, without the hassle We understand that holiday lets can be complicated as there are many aspects to consider before making the final decision. Our aim is to obtain the finance you require on the best possible terms with the least amount of hassle for you. Please contact us even if you do not think you are eligible, we are always happy to informally discuss a proposition. Mortgage criteria is always changing and the holiday let mortgage market is currently expanding with more lenders and more bespoke, unadvertised schemes appearing all of the time. And lastly always ask if there are any restrictions on how the property may be used or occupied before you agree to buy, as this will affect the finance options considerably. Holiday let mortgages and buy to let mortgages are not regulated by the Financial Conduct Authority
Holiday let mortgage ca s e s t u d i e s Case study 1 We were approached by a client interested in making an offer of 636,000 to purchase an existing holiday lettings business. Accounts showed consistent lettings income of 60,000 per annum. However, the property consisted of three self-contained luxury lets, on one freehold title. To make matters slightly more interesting, the applicant was a British Ex Pat. The customer had initially approached a lender providing Holiday Let Mortgages and was turned down flat; lender citing Ex Pat status as the reason. Holiday Let Mortgages arranged a loan of 380,000, interest only, at a non-commercial rate of interest; based on the security and lettings accounts alone. Case study 2 Our client wanted to buy a cottage in South Devon for holiday lettings purposes. However, the longer term plan was to retire to the cottage in around 19 years time. The property was currently owner occupied and as such had full residential usage. A local recognized holiday lettings firm was happy to provide a letter assessing the annual lettings rent at 15,000 per annum. The purchase price was 347,000 and our client had access to a 30% deposit, therefore needing to finance the balance of 242,900. This client knew a colleague who had recently financed a Holiday Let Property through a local building society. This building society restricted the loan it would offer our client to 201,000 as a maximum, citing a lack of rental income over mortgage interest as the reason. Enhanced Wealth approached a more flexible lender that has a "special situations product" available. This product uses a combination of rental and personal income to determine the maximum loan facility available. As such, the lending facility was quickly approved. Case study 3 Holiday let development Case studies Through an Estate in Wales, an existing client had been offered a derelict barn in an ideal location for holiday letting purposes. Full residential planning consent had been granted. The purchase price was 200,000 with 50,000 improvement works required. After works value 285,000-300,000. A loan was agreed for 120,000 towards purchase and 25,000 towards development costs. Holiday Let Mortgages had the loan agreed over 6-8 months, the initial tranche of 120,000 drawn to purchase the property with 35,000 drawn in stages as building works progress. As the property was a development there could be no possibility of rental income available to cover loan interest. Therefore, to ease the cash flow burden, our consultant recommended that during term of loan, the interest should be rolled into the facility on a quarterly basis. After completion of the renovation, we re-mortgaged away from the commercial loan onto a cheaper holiday let mortgage. Case study 4 An IFA came to us with a holiday let development proposition; consisting of a terraced house in a popular Welsh seaside town. However, the property was run down and in need of damp treatment, a complete new kitchen and bathroom. As such, it did not represent suitable security for a domestic lender. The value in its initial state was 130,000, with about 25,000 needed for refurbishment works. End value after works, 210,000 Unfortunately, this client had fully utilised any cash deposits to fund two further rental properties and so was cash poor. We arranged a loan to purchase and re-furbish the property; based on a first charge loan on the development and two second charge loans on the recently purchased buy to lets. In effect this amounted to a 100% borrowing facility, without needing to dispose of or re-finance the rental properties.
Tax rules for holiday lettings (brief guide) To make sure your property counts as a FHL it must be: Holiday let tax tips Holiday lettings, or Furnished Holiday Lets (FHL), enjoys advantageous tax treatment for both income and capital growth. The tax rules to qualify for this beneficial treatment may be quite strict but the overall benefits are very attractive. Holiday lettings are treated as a business by the Inland Revenue, unlike other forms of property letting which are treated as investment (unearned) income. Whilst we are mortgage specialists we are not tax advisers. Please speak to a tax expert before making any decisions based upon tax. Gaining from a loss If you make an income loss from a Holiday Let property investment, the loss can only be used to offset future profits from letting. Don't let your guests stay too long! Periods of occupation by the same person or persons of more than 31 days do not count towards the105 day qualification. In the UK Furnished Available for holiday letting by the public for at least 210 days per year Actually let as a FHL for at least 105 days per year at commercial rates You cannot restrict availability of the property to just friends and family, the general public must be able to book a holiday there. Whilst the property needs to be available to let for 210 days per year, you actually have to let it, on a commercial basis for at least 105 days per year. Tax advantages Your taxable profit for UK holiday Lettings is worked out in the same way as for other furnished rental income, except that you claim 'capital allowances' rather than 'wear and tear' allowances. From the gross rental income, you can deduct mortgage interest payments, insurance, advertising, council tax, agent s fees, service charges, repairs & maintenance etc. You can claim capital allowances on the cost of buying the furniture, TV, oven etc. Selling up You may be able to take advantage of Capital Gains Tax (CGT) reliefs such as 'business asset roll-over relief'. For example, if within 3 years of the sale you buy another holiday letting property costing at least the same at the one you sold, you may be able to defer CGT payments. You may also pay less CGT when you sell a property you have used for UK holiday letting, compared with other residential let property (such as buy to let). This is because a UK holiday letting property is treated as a business asset and should qualify for the new entrepreneurs' relief which has a 10% rate of tax for the first one million pounds of profit. The amount by which the gain is reduced will depend on how long you have owned the property and how long you have used it for qualifying holiday letting. As with all tax rules; these are quite complex. However, there are significant tax benefits available over other types of residential investment property but you need to structure your affairs correctly to get the most from them. Again, this excludes friends and family and means paying guests. Further information on the taxation of Furnished Holiday Lettings (FHL) and buy to let is available from: Adrian Marie FCA Cole Marie & Co Chartered Accountants Telephone: 01737 235 800
We can help with: Mortgage finance: Mortgages for Holiday Let Properties, Second Homes, and Holiday Home, with some Holiday Letting. Capital raising: Capital raising options on any type of property C o m m e r c i a l Fi n a n c e : Commercial loans, bridging loans, property development finance available. Life cover: Protect your mortgages and loans with competitive life cover Income and mortgage p r o t e ction : A range of policies to protect your income or mortgage payments against sickness, accident and redundancy On o u r w e b s it e: About Us Holiday let mortgages is a trading style of Enhanced Wealth Limited. We are an established Independent Mortgage Broker authorised and regulated by the Financial Conduct Authority. We are based in Kent but are able to offer expert mortgage advice to clients throughout the UK and beyond. Smart use of technology and communication means that we can arrange finance 'at a distance' whilst still maintaining high levels of customer service. We care about our clients and we want you to recommend us and return in years to come. We want our business to grow stronger with happy clients. More tax tips and info Mortgage calculator Holiday let insurance For these reasons we will always give you the most appropriate financial advice we can. No jargon and no sales talk, facts, pure and simple, so you can make your own mind up. When you are ready, please give us a call on: 0800 840 3111 IMPORTANT BITS Enhanced Wealth Limited is authorised and regulated by the Financial Conduct Authority. Our FCA register number is 207532. You can check this on the FCA website www.fca.org.uk/register/ or by contacting the FCA on 0845 606 1234. The guidance and/or advice contained within this document is subject to the UK Regulatory regime and is therefore primarily restricted to consumers based in the UK. The Financial Conduct Authority does not regulate holiday let mortgages or commercial finance. The examples shown are for illustrative purposes only, exclude repayment of capital and allowance for void periods and should not be construed as any form of recommendation. Interest rates may vary and taxation, which has not been included in any example, will depend on individual circumstances. The value of investment property and rent levels can go down as well as up. Investors are advised to seek appropriate legal advice before entering in to any contractual agreement. Enhanced Wealth Limited 140 Long Lane Bexleyheath Kent DA7 5AH T 0800 840 3111 T 020 8301 7931 F 020 8304 9788 info@holidayletmortgages.co.uk Holiday let mortgages is a trading style of Enhanced Wealth Limited Registered Office: 140 Long Lane, Bexleyheath, Kent DA7 5AH
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