Could Brexit be good news for holiday lets?
Andrew Turner, (pictured) chief executive at Commercial Trust
Brexit uncertainty could lead to more Britons holidaying in the UK, bolstering demand for holiday let rental homes. This could happen during 2019, in an already growing rental market space.
The logic comes from the present legislative state of the buy-to-let market and uncertainty over what the outcome of Brexit could mean for passport control.
Possible Brexit scenarios could mean many people have less money to travel abroad and choose to holiday closer to home. At the same time, if it becomes more laborious and possibly costs more to travel to Europe after Brexit, this too could have an impact on holiday destinations.
The upshot is that landlords who use their rental homes as holiday lets, could potentially do very well out of Brexit, as a result of growing demand.
Why choose a holiday let?
Furnished holiday lets (FHL) are viewed as businesses by HM Revenue & Customs (HMRC) and consequently, the tax treatment is different to traditional buy-to-let income.
FHLs have not been impacted by the changes to buy-to-let mortgage interest tax relief, meaning an FHL landlord can currently still claim 100% of the interest paid on their mortgage.
Furthermore, income from FHLs may be invested into a pension, where it may benefit from tax relief under present law.
Landlords of FHLs are also able to claim capital allowances on wear and tear and furniture replacement, whilst also having the ability to claim capital gains tax relief as a business.
Net yields on FHLs can also be competitive, compared to returns on buy-to-let investments.
In June 2018, property fund Second Estates indicated that FHLs had an average net yield of 6.1%, compared with 5% for residential buy-to-lets.
It stated that the average weekly income on a holiday let was £563, whilst it was £161 for a typical buy-to-let.
Some lenders will also allow the landlord to live in the property, for a restricted proportion of each year, which is something not permitted with buy-to-let.
Things to plan for
When you are planning the amount you will charge for holidays in your property, bear in mind the seasonality associated with holiday lets and have a realistic picture of occupancy. Local research and input from a holiday letting agent may help.
Lenders factor in void periods to the risk and therefore rates they offer on FHLs. Ensure you have a clear picture of rates from across the market, and be clear that you will need to specify that you are looking for a holiday let product.
You should expect to invest a minimum deposit of 25% of the property value.
If a landlord has owned an FHL for some time and can provide evidence of rental income, this could enhance the loan-to-value that a lender will consider.
Prepare a plan for handling enquiries, turning round the property between lets and how you will advertise your property. You could outsource hands-on work, if you want to take more of a back-seat; investigate the costs and plan accordingly.
What criteria will lenders set?
Lenders will expect holiday let landlords to have a separate income and will often set a minimum amount, which has to be proven.
Lenders will also expect a prospective FHL landlord to have prior landlord experience.
The property must be furnished and commercially let, with the objective of making a profit.
Lenders will set a minimum number of days each year when the property must be available for letting – and typically they will also set a minimum number of days per year that it is let out for.
The holiday lets market is growing. Lenders once viewed this industry with caution, but are increasingly seeing opportunity, as more landlords and investors see the potential of holiday lets.
A year ago Commercial Trust worked with a handful of lenders offering FHL mortgages. That number has swelled to 15 now, with a wider range of product choice.
Undoubtedly a number of property investors have reacted to the changing buy-to-let environment by turning to FHL, which has encouraged more lenders to operate in this market.
Brexit’s outcome remains uncertain, but it could be the catalyst for more opportunity over the coming months