Feature: Stay boom fuels demand for vacation mortgages

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As the future of overseas travel still hangs in the balance and tax hikes shine rental yields, investors are showing increasing interest in UK vacation rentals.

Lenders are re-entering the market and expanding their product lines, suggesting that they too see short-term leasing as a sound investment. Meanwhile, brokers specializing in this sector report being busier than ever, and many advisers who have not traditionally focused on this sector of the market see it becoming a growing part of their business.

Moneyfacts personal finance expert Eleanor Williams said, “As uncertainty surrounding overseas travel persists, the vacation rental mortgage market has continued to thrive. The number of products available to investors considering a vacation rental and the number of vendors catering to this demographic have increased since early April. Indeed, there are now more lenders offering these products than before the start of the pandemic. “

Figures from the price comparison site show that the number of products available for short-term rentals has more than doubled from 74 last August to 156 at the time of writing, which is just below the level seen before the pandemic only struck in March 2020, when there were 162 offers available. There are now 23 lenders in this space, up from 20 in March of last year. But the sticking point for investors remains the cost of borrowing, with the average rate now at 3.95% compared to 3.37% before Covid.


In terms of criteria, Ipswich Building Society offers the highest loan-to-value level of up to 80%, with a rate of 4.1% for a two-year fix and a fee of £ 1,149. For those with larger deposits, the cheapest offer is from Furness Building Society, at 3.19% for a two-year discount rate of 65% LTV with a fee of £ 995.

Besides Hodge, InterBay Commercial and West One, most of the other lenders active in the vacation rental market are construction companies including Cambridge, Cumberland, Leeds, Market Harborough, Monmouthshire and Principality. Some only returned recently after a hiatus during the pandemic.

The Tipton & Coseley offers a Vacation Home Mortgage, which unlike others is classified as a residential loan and intended for borrowers who wish to remain in the property themselves. He has a reduced three-year agreement at 2.74% up to 75% LTV, but specifies that borrowers do not have to rent their property permanently. Affordability is based on the applicant’s income rather than the rental value of the property, and the lender specifies that the vacation home should not be “close” to the borrower’s primary address.

Another sign of growing demand from buyers, the average price of a holiday home has increased 12% in just six months, from £ 387,993 in October 2020 to £ 435,476 in March 2021, according to Hodge. The lender also saw a 30% increase in vacation mortgage applications over the same period. The most popular destination for holiday home buyers was the South West, with 39% of mortgage applicants, followed by Wales with 19% and the North West with 12%.

House & Holiday Home Mortgages director Mark Stallard says his experience reflects this trend.

“It’s a crazy, busiest world I have ever known. I hear about people buying properties they haven’t even visited because the competition is so strong. The types of requests we receive are diverse; some are easy and some are extremely complicated. You could have houses with annexes; buyers who have never owned a property; those who do not even own property yet; two houses on the same title; or expats trying to buy.

Stallard says he’s seeing a wide geographic spread, with the usual hotspots of Devon and Cornwall maintaining their popularity alongside the Cotswolds and the Lake District. But there are also people interested in buying second homes in less obvious destinations, especially when they may have a personal connection to a region.

For Stallard, knowledge of both industry criteria and lenders is essential.

“There are a lot of variables and relatively few lenders,” he says. “Most are trained in the residential market rather than the commercial one, so they tend to be quite risk-cautious. Some investors see vacation rentals as the new rental purchase [BTL], but there are caveats: it’s hard work and it’s not all jam.

“You have to take into account the management costs and there are other problems; for example, we hear that it’s very difficult to get cleaners in some parts of the country. We try to talk to our clients throughout the experience rather than just saying “Here’s the mortgage for you”.

“When it comes to finding the right lender you have to know what you are doing because there are so many rabbit holes you can stumble upon and you are dealing with a very anxious, impatient and excited client. “

Favorable tax treatment

One of the reasons that so many investors are considering short term rentals is the tax treatment. The crackdown on tax breaks for landlords offering standard rentals has prompted some to look elsewhere for the best returns. For properties that meet HM Revenue & Customs’ definition of a furnished vacation rental, investors can offset mortgage interest and other costs such as energy bills, gardening, and cleaning with their profits to reduce their tax invoice.

To qualify for the relief, the property must be available for rent to vacationers for at least 30 weeks per year and it must be rented for at least 15 weeks per year. Rentals longer than 31 days cannot be included. Investors can claim capital deductions for the cost of decorating and furnishing their property and they can benefit from certain capital gains tax breaks when it comes to selling. In most cases, vacation rental owners are likely to be subject to business rates rather than council tax, although some relief may apply.

However, those who are venturing into the vacation rental world head first should be aware of the threat of new regulations. London has already limited short-term rentals to 90 nights per year, with platforms like Airbnb automatically preventing owners from exceeding this limit unless they have an exemption from their local authority. The rule does not apply to those who rent a room in their own home, but rather to those who rent entire properties.

Meanwhile, the Scottish Government is working on regulations to give councils the power to designate controlled areas in which owners would need a building permit for a change of use in order to lease property on short notice.

The subject is likely to remain controversial as the supply of affordable housing across the UK remains under pressure. Boards are faced with a difficult balance between competing needs. On the one hand, they want to support local businesses by encouraging tourism, especially after the economic damage caused by the Covid. On the other hand, they need to make sure that there are plenty of long-term rentals available for local residents, as well as homes that first-time buyers can afford.

The potential of future housing policy to dampen short-term rentals does not seem to deter buyers. Holiday Cottage Mortgages manager Andrew Soye said business was up about 30% from what he would expect at this time of year.

“We’re seeing a lot of interest in classic locations, with huge demand for Cornwall, Devon and the Lake District, as well as areas where your money goes a lot further, like the Northumberland coast and Pembrokeshire,” he says. .

Soye started the brokerage after co-founding a luxury vacation rental business, which was sold to Sykes Cottages. It was while leading this first company that he understood the difficulties of obtaining financing for short-term rentals and saw the opportunity to establish himself in this specialized area of ​​consulting.

He says many vacation rental buyers are self-employed, which adds an extra layer of complexity to the mortgage lending process. He estimates that more than half of his clients fall into this category, ranging from freelancers working in the media to savvy builders who have a knack for making money with real estate. On the employee side, vacation rentals are of great interest to wealthy people, from NHS consultants to city heavyweights.

“We get real big hitters, so I’m never surprised to see the CEO of a big company or a partner in a Magic Circle law firm. “

Customer categories

According to Property Master Managing Director Angus Stewart, there are two main categories of clients: those who are considering vacation rentals from a purely investment perspective as an alternative to BTL, and those who primarily want a second home but also want to generate revenues.

“I encourage clients to make sure they go at it with their heads rather than their hearts,” says Stewart, “and looking at the proposal from a business perspective rather than being overly influenced by the place they would like to spend a few weeks of the year on vacation. Some places you might be emotionally attached to, but other people might be a bit isolated or not enjoy the same. “

Another broker who has seen a flurry of vacation rental inquiries is Lloyd Wells Mortgages manager Adam Wells. As the company is based in Bristol, it is well positioned for city dwellers looking to invest in Somerset and Devon.

Wells says, “People look for vacation rentals because the returns can be much higher than traditional BTLs, and most lenders allow you to stay in the property yourself for 60 or 90 days. Also great is the fact that you can have agents handle all aspects of the rental. “

For years, the scarcity of mortgage loans for vacation rentals has been at odds with the popularity of sites like Airbnb with travelers. Now that product selection improves and lenders seem more comfortable with risk, that could be about to change.

It will all depend on when overseas travel can resume in earnest. If UK holiday home investors were to be burnt by a sudden resurgence of Britons venturing abroad, it could shake confidence in the industry and cause a pullback. Still, many expect overseas travel to be restricted for some time as countries grapple with new variants of the virus and uneven access to vaccines.

Home buyers and vacationers can therefore rest assured to rest on the shores of their homes.

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