Buy-to-letAug 23 2018

What to know about the holiday let market

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What to know about the holiday let market

Holiday season in the UK is well underway, with many families and couples choosing to book an apartment or holiday cottage in Britain, rather than overseas.

‘Staycations’, as they are known, have become increasingly popular – this year, the UK’s exceptionally hot summer months meant many did not feel they had to go abroad to enjoy sunnier climes.

Meanwhile, the decline in sterling’s value following the vote to leave the EU, has seen many people decide not to risk losing out by exchanging their hard-earned pounds for euros or US dollars at the airport.

Finally, there are plenty of holiday lets in the UK that now cater to all needs and offer luxury holidays without having to venture far from home.

Advisers’ clients may well see the appeal in holiday lets as another avenue of income, having witnessed the popularity of holidaying at home.

According to VisitBritain, there was a 5.8 per cent rise in domestic holidays in the UK in 2017. 

The availability of holiday let mortgages has been steadily increasing in the past few years.Guy Nyirenda

The Sykes Staycation Index 2018, which reviews the holiday let and staycation market in the UK reports that in 2017 56 per cent of all adults "staycationed", and that 74 per cent planned to do so in 2018.

But typically getting a mortgage on a holiday let has been a more specialist area for lenders.

Niche area

Danny Belton, head of lender relationships at Legal & General Mortgage Club, observes: “In recent years we have seen an increase in the number of lenders offering products in the holiday buy-to-let (BTL) sector, namely regional building societies and specialist BTL lenders, as it is quite a niche area of the market.”

Guy Nyirenda, a partner at Coreco, has noticed a similar trend, and acknowledges lenders are always looking at niche areas to enter in the “overcrowded” BTL market.

“The availability of holiday let mortgages has been steadily increasing in the past few years,” he explains. 

“Historically, these have only been offered by building societies, but recently more specialist BTL lenders have stepped into the market, which has increased competition and provided better mortgage product choice.”

One of these is Mansfield Building Society, which in July this year announced it has added a holiday BTL offer to its mortgage range.

Its holiday let offering provides loans up to 70 per cent loan-to-value (LTV) and, most notably, allows holiday let landlords to personally occupy the property for up to 60 days a year.

Typically, most holiday let mortgages do not allow for personal use.

Mike Taylor, head of products and savings at Mansfield BS, notes: “There is increasing competition in the holiday BTL market, with a number of new market entrants who are offering increased choice to potential landlords and innovation in the criteria applied.”

But Karen Bennett, managing director of commercial mortgages at Shawbrook Bank, suggests although there are some lenders in the market, servicing particular niches, the holiday let market is “badly underserved”.

“Many take the approach of underwriting these properties as buy-to-lets based on market rent on an assured shorthold tenancy (AST) basis which may limit loan sizes, particularly if [the property is] in coastal areas not suited to standard residential letting,” she comments.

Do your research

So what do clients need to consider before entering the holiday let market?

Much like the residential BTL market, landlords will need to think carefully about the location of their property and the area's attraction as a holiday destination, and the potential for that property to be vacant, meaning there are likely to be fluctuations in income.

Source: The Sykes Staycation Index 2018

In other words, it needs to be treated like a business decision.

Mr Nyirenda points out there are various considerations to take into account when looking at this option.

“Firstly, research into the demand of the locations that are being considered is paramount,” he notes. 

“The nature of the holiday let being seasonal means you can only rely on income for part of the year, so you need to make sure there is enough reserve to cover the periods where there is little income as the mortgage still needs to be paid.” 

Mr Taylor agrees: “Landlords considering a holiday let property need to carefully consider the income they receive as the holiday season fluctuates depending on demand at different times of year, and as a result, must be attentive to the likely occupancy rates. 

“Lenders also want to see that there are no property or occupancy restrictions which could hinder the re-sale of the property in case anything went wrong.”

Those clients who are hoping they can use the holiday home not just as an investment, but also as a place for them to take their own holidays should be aware that many lenders will not allow this.

Mr Nyirenda explains: “A lot of traditional holiday BTL homes have restrictions on how much of the year they can be let for or used for their own use, so a solicitor should be used to check if there are such restrictions on the title of the property before purchasing.”

He also points to the maintenance and upkeep of a holiday property, particularly if the owners live some distance from it.

“I would always recommend initially engaging a local letting agent to manage the property, especially due to the high turnover of guests in the busy season [which] makes this difficult to personally manage,” he suggests.

There is more on the tax treatment of holiday lets in the next feature in this guide but Mr Taylor notes: “There are advantages for holiday let landlords, with furnished holiday lets receiving a more favourable tax treatment compared to other residential property letting under HM Revenue and Customs (HMRC) rules.” 

Riding the tourist wave

There may be no further detail about the terms under which the UK will leave the EU in March 2019, but many believe if the value of the pound does not recover and travelling abroad, particularly to EU countries, becomes more difficult then the staycation could become the norm.

In 2017, there were 39.2 million visits by overseas residents to the UK, 4 per cent more than in 2016 and the highest figure recorded, according to the Office for National Statistics (ONS). Its also states: "The number of visits has increased each year since 2010."

The ONS also confirms holidays are the most common reason for people visiting the UK, with 15.4m holiday visits to the UK in 2017, up 11 per cent on the previous year, and accounting for 39 per cent of the total visits.

“If some of the demand for holidays overseas transfers to demand in the domestic market as a result of Brexit, this will be an opportunity for the sector,” Mr Taylor says.

Mr Nyirenda observes: “There has been an influx of overseas visitors due to the weakening of the pound, making UK holidays cheaper.”

He also points out “a recent relaxation of local planning laws in holiday locations has allowed more properties to be made available for purchasing”.

“People will always want to go on holiday and holiday lets not only give people the local accommodation they’re looking for, but also the flexibility that hotels can’t offer,” explains Mr Belton. 

“Over the years, many rental properties have become better equipped, but it’s also become easier to market these properties thanks to the internet, so their popularity is only set to increase.”

eleanor.duncan@ft.com