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Buy-to-Let Watch Episode 10

Buy-to-Let Watch Episode 10

Buy-to-let watch episode 10 | An Extraordinary Long View of Short-Term Lets


Liz Syms
Liz Syms, CEO and Founder of Connect Mortgages

In the newest episode of our Buy-to-Let Watch series, “Buy-to-Let Watch Episode 10 | An Extraordinary Long View On Short-Term Lets,” we aim to provide our readers with the latest updates on regulatory changes related to short-term lets. This contrasts with the previous episode, “Buy-to-Let Watch Episode 9 | The Extraordinary Tale of When BTL Gets Tricky.”

The government recently disclosed prospective modifications to the regulatory framework governing short-term property rentals, encompassing holiday lets and platforms like Airbnb.

These potential adjustments might impact the guidance we provide to clients seeking to lease their properties on a short-term basis.

The government’s outlined reforms stem from its overarching objective to strike a harmonious balance between the economic advantages of short-term rentals and tourism while simultaneously addressing the crucial requirement for affordable housing within local communities.

In light of these proposed changes, we must reassess and adapt our advice to align with the evolving regulatory landscape, ensuring our clients are well informed about the potential impacts on their short-term rental endeavours. Buy-to-Let Watch Episode 10 will take a long view of short-term let.

Buy-to-let watch episode 10 | Short-term lets qualify as a trade for tax purposes if they meet specific criteria

Significant changes are on the horizon in response to the burgeoning popularity of short-term rentals, especially holiday lets. These transformations stem from proposed legislation that mandates planning permission for short-term rentals, potentially curbing their proliferation in areas where housing shortages are already a concern.

The government advocates a fresh registration scheme for short-term lets in conjunction with these planning adjustments. The primary objective is to compile comprehensive data, shedding light on these rentals’ quantity and geographic distribution, thereby facilitating a better understanding of their impact on local communities.

Outlined within the Levelling-up and Regeneration Bill, currently under parliamentary scrutiny, these proposed changes are subject to the outcome of an ongoing consultation set to conclude on 7 June 2023. If the consultation yields positive results, the expectation is for these modifications to be enacted later in the year through subsequent legislation.

The surge in short-term lets, fueled by factors such as the rise of ‘staycations’ and the tax benefits associated with this type of accommodation, has prompted the need for regulatory measures. These changes aim to address housing shortages and ensure more balanced and sustainable growth in the short-term rental sector.

Buy-to-let watch episode 10 | Lenders typically fall into one of two camps of criteria

The tax implications for short-term let properties differ significantly from those associated with standard rental properties. Short-term lets are considered a trade for tax purposes under specific conditions, such as ensuring the property is available for letting for a minimum of 210 days per year. Meeting these criteria allows investors to qualify for various tax reliefs, including the coveted mortgage interest relief.

Unlike standard buy-to-let (BTL) properties held in an individual’s name, where mortgage interest relief is capped at 20%, short-term lets do not face such restrictions. This exemption makes short-term lets particularly appealing to higher-rate taxpayers, presenting them with a more tax-efficient investment option. Additionally, the absence of this limitation enhances the overall attractiveness of short-term lets as a viable investment strategy for those seeking optimal tax benefits.

Investors must be well-informed about these distinctions in tax treatment, as they can significantly impact the financial outcomes and feasibility of their property investment endeavours.

Buy-to-let watch episode 10 | Higher yields

If you are looking for an option where the whole holiday rental income is considered, you will need a more commercially minded lender

The surge in popularity of short-term holiday lets can be attributed to several factors, with higher yields standing out as a significant driving force. Compared to standard Buy-to-Let (BTL) properties, a well-located holiday-let unit during peak season can generate weekly income equivalent to a month’s revenue in a traditional BTL arrangement.

Buy-to-let watch episode 10 |  Financial Advantages: The allure of higher yields becomes especially pronounced in times of escalating interest rates. However, it’s crucial to recognise that various considerations accompany the financial gains. Beyond the rental income, property owners must factor in expenses such as furnishings, maintenance, management fees, and the costs associated with promoting and booking holiday lets.

Buy-to-let watch episode 10 | Mortgage Considerations: From a mortgage standpoint, short-term lets can serve as a viable solution for properties that might not align with the conventional rental affordability calculator.

Nonetheless, advisers need to exercise caution and thoroughly understand the intricacies of the lender’s offerings, as it is not always a straightforward process.

Buy-to-let watch episode 10 | Diverse Lender Criteria: Lenders in the market generally adhere to one of two criteria categories. The first comprises specialist lenders like Foundation and Molo, who provide short-term lending options without the complexities of treating the loan as a business.

Unlike traditional Buy-to-Let arrangements, these lenders may not require an Assured Shorthold Tenancy (AST). Instead, they conduct a rental assessment as if the property were a standard BTL, basing affordability calculations on this evaluation. Advisers must navigate these nuances carefully to ensure optimal financial outcomes for their clients.

Buy-to-let watch episode 10 | Exploring comprehensive holiday rental income options with commercially oriented lenders

A lender may consider holiday lets but will not automatically consider Airbnb or serviced accommodation

If you’re searching for a financing solution that considers the entirety of your holiday rental income, it’s essential to partner with a lender with a commercial mindset. These lenders have the capability to assess applications based on the actual income generated by the property. However, it’s important to note that different lenders employ varying methods in calculating this income, and the proportion utilised may also differ.

For instance, Paragon offers a unique approach. In cases where the client has owned the property for over two years and the provided accounts can demonstrate two years’ worth of holiday rental income, the gross annual rental income, averaged over a 12-month period, can be leveraged.

The key condition is that it must equal or exceed the interest coverage ratio (ICR) of 150%. This tailored approach ensures a comprehensive evaluation of your holiday rental income, providing a nuanced and flexible financing solution.

We reached the end of our publication on “Buy-to-Let Watch Episode 10 | An Extraordinary Long View On Short-Term Lets”; until next time, stay Connect!

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