Holiday Let Mortgage Helps Market Size Grow 33% in One Year

New research has found that the number of active holiday rentals has increased by 33% in some of England’s most popular short-stay destinations, with the increasingly popular holiday rental mortgage helping to spur this significant growth of the market.

The short-term vacation rental market has been booming ever since the rise of Airbnb brought the sector to everyone’s attention.

Gone are the days when vacationers and city breakers went straight to hotel booking platforms, their first call is almost always the big vacation rental sites.

The constant demand has led to more and more holiday rentals appearing on the UK market.

In the first quarter of 2021, across ten of the UK’s most in-demand holiday rental destinations, there were a total of 99,314 active rentals on the market.

By the first quarter of 2022, that number had risen to 100,551, an increase of 1.25%.

The biggest increase was reported in the Lake District where the number of active rentals rose from 5,693 in 2021 to 7,591 in 2022, an increase of 33.3%.

Strong annual growth was also reported in the Peak District (25.2%), Cotswolds (25%), Cornwall (24.1%), Devon (21.1%), Brighton (13.1% ) and Liverpool (10.8%).

Three of the popular vacation rentals, however, saw an annual decline in the number of active rentals and they are all located in major cities – London (-17.1%), Newcastle (-11.6%) and Manchester (-1, 7% ).

The seasonal rental mortgage

It’s no surprise that the number of people involved in the vacation rental industry is growing.

There is a clear demand and, therefore, the potential to make good profits.

The popularity of the sector is such that most mortgage providers now offer a specific mortgage for vacation rentals.

What is a Vacation Rental Mortgage?

A vacation rental mortgage is designed specifically for people who are looking to borrow money to purchase a property they plan to rent out in the vacation rental market.

It’s different from the familiar mortgage on a vacation home, which is essentially a mortgage on a second home because the buyer is the only one using the second property, and it’s also different from a rental mortgage because that the buyer is not going to rent the property through long-term rental agreements.

The reason a vacation rental mortgage should be different from more common types of mortgages is that a vacation rental is rented for days at a time rather than months or years.

This means that income can fluctuate wildly between peak periods of occupancy and months when there is very little income.

This less reliable revenue model means that a standard mortgage just isn’t suitable.

Tax Benefits of a Vacation Rental Mortgage

Besides being tailor-made for landlords with unpredictable rental income, vacation rental mortgages also offer some pretty significant tax advantages for the landlord.

For example, a furnished vacation rental qualifies as a business. This means that it is possible to deduct your expenses from your rental income before submitting your figures to the tax authorities.

In addition to running costs, this means you can also deduct the interest you pay on your mortgage.

To benefit from these tax benefits, HMRC has a series of criteria that the owner must meet.

For example, the property must be available for rental at least 210 days per year and must be occupied at least 105 days per year.

However, each rental cannot exceed 31 consecutive days. Any stay longer than 31 days does not count towards this minimum of 105 days.

What rental income should I earn?

Vacation mortgages tend to require a down payment of between 25% and 30%.

Lenders will then take a close look at the property and its location to assess the rental income they think it can generate.

This potential income has a direct impact on the mortgage offer they are ready to make to you. Typically, they want the income to exceed 125% to 145% of the interest payable on the mortgage.

They might also ask you to demonstrate your ability to pay mortgage repayments during months when rental income is lowest or the property is completely vacant.

Can you, for example, afford to pay with your savings or other income if needed?

For example, if your holiday property costs £250,000, a 30% down payment or £75,000 will leave you with a mortgage of £175,000.

If the interest rate averages 5%, your interest-only payment will be £729.17/month or £8,750 per year.

This means that to meet the above criteria of 145% interest you will need to demonstrate that you will be able to generate an annual rental income of £12,688 in order to qualify for a holiday rental mortgage.

CEO Jonathan Samuels of Octane Capitalthe company behind the research, commented:

“Vacation rentals offer a much more private and self-contained vacation experience than hotels.

They offer more space and more freedom.

No wonder the market is booming in most parts of the country.

Because vacation rentals are now the first choice for a large part of the population, more and more people are thinking of ways to make money with the sector.

Some people simply open up a vacant room in their home, but others buy new properties for the sole purpose of putting them on the vacation rental market.

Although this is an attractive idea, it is one that requires careful consideration.

The old idiom of place, place, place has never been more appropriate. If you can’t buy a property in a popular short-term rental location, you’ll really struggle to generate profitable income in that industry.

It’s about finding locations that offer the perfect balance between affordability and strong, reliable rental income.

This is often easier said than done. »


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