Holiday lets gain ground against BTL for individuals looking to invest

Holiday let products have grown rapidly in popularity over the past year as tax benefits and a staycation boom in combination with lockdown savings have tipped would-be investors into action.

While temporary, Covid-driven international travel bans have driven up yields and occupancy levels for UK-based holiday let properties, underlying drivers suggest that growth in the segment will continue even as borders open up.

Drew Somerston, associate director, private clients, at LDNFinance, said: “Over the last eight to 12 months there has been a massive influx in enquiries – one of the reasons probably has been Covid, and there are other reasons as well.”

Good levels of support and expertise from local holiday lettings agencies and the rise of easy-to-use websites for letting properties have contributed to making the option attractive to investors. 

Additionally, those who had previously toyed with the idea of investing in an out-of-town property were now viewing seaside or countryside locations with an even rosier hue.

The range of products on offer from lenders has added momentum to the market with various options available depending on what the client is looking to do.

“They can do it as residential and holiday in it most of the time, then let it out for a small portion the year. Or the flip side, where they are buying it as a holiday let, they get a holiday let mortgage. Many lenders allow you to live in the property for a couple of months a year, some up to three months,” said Somerston.

The varying criteria on offer from lenders include if they require minimum personal income, and at what level, whether they accept Airbnb lets, if it’s a first-time lettings venture, and if personal use is allowed.


BTL versus holiday let

There are advantages over buy to let (BTL). These include more favourable tax rules and potentially less onerous affordability calculations owing to the higher yields.

Liz Syms, chief executive at Connect Mortgages, said: “To understand what’s going on in the market, you have to go back to the tax changes that phased in from 2017. Prior to those tax changes, there wasn’t really a holiday let mortgages market. People would be running a holiday let but using a BTL mortgage.” 

The response from lenders to the tax policy shift was to develop more holiday let products. Moneyfacts data showed that 159 holiday let mortgages were available from 24 lenders, comprising 91 fixed and 68 variable rates including three tracker deals, as of 23rd June 2021. The average fixed rate on a holiday let product was 3.87 per cent.

The list of 24 providers consisted of 18 building societies and six private banks.

Somerston said: “Rates are a touch higher than for a standard BTL. Inevitably, because it has grown so much, you’d think the mainstream BTL lenders would have to take up a portion of this market. It’s very lucrative.”


Product variation

There are two types of holiday let. One is a BTL product with permission to let on a holiday basis, where affordability is calculated based on expected income as for an assured shorthand tenancy (AST). The second is a commercial loan, which looks at the profit and loss of the lettings business.

“They will ask a local holiday letting agent to advise the low, mid and high season rates for the property, assume, say, 30 weeks occupancy, and take an average,” said Damian Cain, director, Complete FS.

The difference in income for a holiday let business would typically be about 50 per cent higher compared to a standard AST.

National parks, coastal towns and villages and countryside beauty spots are all potentially in scope, thought there are restrictions on location.

Chris Blewitt, head of intermediary distribution at Darlington Building Society, is among those who believe staycation culture will continue to support the holiday lets market well beyond the ending of restrictions on flying abroad.

Darlington Intermediaries launched its holiday let offering two weeks ago, having put the plans on hold in the teeth of the lockdown in spring 2020.

“We’re in the North East, about 10 miles from beautiful Northumberland coastline, and we have historic sites. It’s always been there, but you get wowed by holiday brochures to Spain.

“In the longer-term, people will want to visit the world, but lets in more traditional places, like the Lake District and seaside resorts, will certainly continue to be stronger than they were going into the pandemic,” he said.


Credit: Liz Bury