Ever dreamed of owning a buy-to-let property? It promises an easy income and a great return on investment. But what about tricky tenants, fluctuating house prices and the cut to capital gains tax? Perhaps it doesn’t sound so rosy after all.
Recently, buy-to-let has fallen out of favour. Once such a popular option, we are now seeing more people investing their money in holiday homes. In fact, according to specialist broker Holiday Let Mortgages, holiday home landlords can earn up to three times more in rental income than their buy-to-let counterparts.
Still dreaming of that buy-to-let property?
Wish you were here? The rise of the holiday home
Holiday homes have become a popular investment for two key reasons:
- A property in a holiday hotspot can command high weekly rates.
- It offers a home away from home for your family whenever the property sits empty.
During peak seasons (six weeks in the summer and two weeks over Christmas) rental prices can more than offset the other 44 weeks of the year. According to October’s listings on holidaylettings.co.uk*, a two-bedroom lodge sleeping four in Paignton, Devon costs £1,590 for a week over Christmas. Meanwhile, a two-bedroom cottage in the same town is advertised on Rightmove.co.uk* at £650 a month.
Both properties may be located in the same area, but the two rental markets couldn’t be more different.
Top 5 UK holiday home hotspots
The downside of holiday homes
There is, of course, a flipside, with holiday homes bringing their own share of disadvantages.
- Holiday homes cost more in upkeep and maintenance than buy-to-let properties.
- You may need to enlist the help of a managing agency. According to Holiday Let Mortgages director Norman Phillips, agents will typically charge 20-30% to manage holiday rentals, but just 12.5% to manage buy-to-lets1.
- The more you depend on the rental income to support your own financial situation will impact how you market the property.
It’s up to you to decide whether the financial reward is worth the extra hassle.
Number crunching: tax relief and stamp duty
Announcements by former Chancellor George Osborne have played a part in the situation.
- A cut in capital gains tax (from April 2017) expressly excluding buy-to-let purchasers means landlords on high incomes could lose out in terms of mortgage interest payments.
- An increase in stamp duty for anyone buying a second home means an extra 3% since April this year2.
These announcements have made it harder for buy-to-let investors to keep their loan-to-value at a minimum.
The next step: funding your holiday home
If you’re serious about buying a holiday home, you need to decide how you are going to fund it. The main difference between buying a holiday home and buying a property to let is how the mortgage is calculated.
Whereas a buy-to-let lender can determine an annual rental figure based on a visit and valuation of a property, this is not possible when dealing with holiday homes. The potential letting income on holiday homes will fluctuate and can be considerably higher than traditional rental, but without a shorthold tenancy agreement these figures are impossible to confirm. The mortgage loan size for a holiday home is instead based on an income projection figure. Not quite as clear cut.
Taking the plunge
Without doubt, there will always be a sense of security that comes with a bricks and mortar investment. If you decide to invest in a holiday home, be sure to do your homework: work out exactly what holiday-makers are looking for in a property (be it hot tub, wifi or child-friendly).
And do your sums too. Are you able to cover the mortgage when the property is not occupied? Crunching the numbers allows you to gauge how much of a risk you are willing (and able) to take.
So, that just leaves the number one rule for anyone entering the holiday home housing market: don’t use it for a family holiday during those precious six weeks of peak season.
We’ve based the information in this article on our understanding of HM Revenue & Customs practice as at October 2016. Tax rules are subject to change in the future and depend on your individual circumstances.
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