Buying a holiday home: the ultimate guide

Buying a holiday home has become increasingly popular. Trends such as flexible working and holidaying on British soil are expected to persist post-pandemic, increasing the attractions of having a bolthole. And the property can also be let out for extra income at times when you’re not using it.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: 'There’s been a boom in people buying holiday homes. This can be a useful source of extra income, as long as you do your research carefully and ensure you know all the obligations involved in buying a second property.'

But when it comes to purchasing a holiday pad, especially if you want to use it to generate income, the process is more complicated than buying a house as your primary residence.

What are the pros and cons of buying a holiday home?

Here we explain the pros and cons of buying a holiday home, and how to finance a purchase.

Pros

• You can enjoy holidays in a place you’ll really get to know, without the hassle of finding and paying for somewhere to stay.
• You’ll have an investment that could also improve your quality of life.
• You can invite your family and friends to holiday there, too, alongside making extra income from letting out the property.
• Furnished holiday lets offer far greater returns than buy-to-let property investment. Depending on their location you can sometimes charge, per week, what you’d receive per month from an investment property.
• Holiday lets come with attractive tax benefits, as they’re classed as a business rather than an investment. These include being able to deduct 100% mortgage interest costs from rental income before your tax bill is calculated. Plus capital allowances for wear and tear and property improvements.

Cons

• You’ll pay the 3% Stamp Duty Surcharge on the purchase price of a second home in the UK and abroad, which can add a substantial cost.
• If you’re planning to let your holiday home this could be time-consuming. You’ll need to manage all the necessary administration. From replying to emails and dealing with any queries or complaints. You’ll need to keep track of your outgoings for tax purposes, advertise the property, and maintain it to a good standard. Even if you employ an agency to manage bookings and customer service, you’ll still need to sort out repairs and cleaning between lets.
• To attract guests, you’ll need to ideally offer plenty of modern comforts, and personal touches for the best reviews and repeat bookings.
• There are strict rules on holiday lets. Your holiday home must be available to let for at least 210 days (30 weeks) a year to qualify for furnished holiday let tax reliefs.
• If you need the maximum income from your holiday home, you won’t be able to stay there during the peak summer months – as they’ll be your most lucrative.

What kind of mortgage do I need for a holiday home?

The way you finance your holiday home purchase depends on whether you're buying for personal use or to generate an income. If you’re buying the property as a second home solely for your use, you can get a standard residential mortgage.

However, if you let out the property, you’ll need a specialist furnished holiday let mortgage, and these are generally more expensive. The good news is more providers are coming into the market as the popularity of holiday homes increases. This may bring down costs. Currently, lenders include Leeds, Principality, Cumberland and Monmouthshire building societies. Harris says: 'Lenders will usually require the borrower to have a higher minimum income than on a traditional buy-to-let mortgage due to income fluctuations on a holiday let.'

Beware that some lenders insist that a property is marketed through a holiday lettings agent, rather than Airbnb, and that they receive a forecast of weekly earnings or proof of previous earnings.

An alternative to this approach is to raise money by remortgaging your own home. This can make more financial sense - but remember that with any mortgage, you could lose the property it is secured on if you do not stay on top of the repayments.

What if my holiday home is abroad?

If you’re buying a property overseas, getting a mortgage can be more difficult. Simply because foreign lenders usually ask more questions before they’re willing to lend. There also tend to be fewer lenders willing to offer finance to British buyers. Particularly post-Brexit, and you’ll need a larger deposit of up to 50% of the purchase price.

It’s essential to seek professional advice from a mortgage broker and tax specialist, as rates for buying, selling and letting abroad can be prohibitive, on top of mortgage costs.

What insurance do I need to have in place when buying a holiday home?

Whether your holiday home is on UK soil or abroad, you must buy specialist insurance if you’re letting the property. Holiday let insurance typically includes cover for things such as public liability, so if someone suffers an injury or dies while staying in the property, and accidental damage. You’ll also get cover for loss of rent that can give peace of mind during extended periods when the property is unoccupied.

If you’re buying abroad, comprehensive buildings and contents cover is especially vital, particularly if you won’t be living there all the time.

Are there any hidden costs I should be aware of?

Holiday lets can be empty for weeks at a time, particularly during winter. So you’ll need money set aside if you have a mortgage to cover repayments, utility and council tax bills. If you use an agent to manage bookings and customer service, they can charge up to 20% of your rent.

Bear in mind that the cost of cleaning and repairs will typically remain the owner’s responsibility. If your holiday home is located far from home, you’ll be paying travel costs to get there too. These costs can mount up if you plan to visit often, or have to fix a particular issue.

How can I maximise my returns when buying a holiday home?

Location will be a major factor in maximising returns. Properties in Dorset, The Cotswolds, Peak District and Devon being the most lucrative areas for holiday lets, according to cottage rental agency Sykes Cottages.

Bev Dumbleton, chief operating officer at Sykes, says: 'Holiday lets with a hot tub earn 50% more on average than those that don’t. Open fires and woodburners also boost returns.'

With more of us working from home than ever before, access to fast internet and a workspace could also be important.