Buying a property to use as a vacation home can be a worthwhile investment, but it’s worth knowing the facts before getting a mortgage for your vacation home.
Vacation rentals can be a great investment, especially if you want to own a home that will be used by tourists but can also be enjoyed by you and your family. Unlike a typical rental investment, vacation rentals will likely have multiple occupants throughout the year, each staying a week or two at a time.
As a result, you will usually have to meet more stringent loan requirements, which will differ depending on whether you are buying property in the UK or overseas.
Either way, if you want to stay in the property yourself and use it as a vacation home from time to time, the mortgage application criteria will likely be a bit more stringent than if you constantly rent it out.
If you want to buy a vacation home for your own use or that of your family, a standard second home mortgage is probably a better choice. However, getting one can be tricky if you are already paying a mortgage on your primary residence or other property; you will have to follow stricter lending rules and affordability assessments to prove that you can make two mortgage payments. You are also likely to have to pay higher interest rates and fees than with a standard mortgage.
What is a seasonal rental?
Technically, a vacation rental is classified as a second home, unless you plan to rent it out for most of the year, or it’s actually the only property you own. So what’s the difference between a second or vacation home and a vacation rental?
First, a vacation home is a home that is likely to be empty for much of the year. You can come and go for your vacation, but you won’t have other visitors staying there and paying you rent.
A vacation rental property, on the other hand, is an investment and, essentially, a small business, which means that you will be responsible for maintaining the property and trying to attract repeat visitors to increase your rental income as well. throughout the year.
How to obtain a mortgage for seasonal rental?
Few of the major banks and real estate companies offer mortgage loans for vacation rentals. Even though they offer standard mortgages, vacation mortgages are a different type of risk that they have to take on.
This is because vacation properties are not rented year round. You can also have high and low seasons, which means your rental income is likely to fluctuate.
With a standard purchase to lease a mortgage, you may only need to find one tenant who will commit to staying for a year. This provides more security to the lender that you will be able to pay off the mortgage.
Therefore, you will have to deal with additional checks to ensure that you can keep track of repayments whether or not you have the house rented all the time. And you’ll probably need a bigger deposit than with a standard mortgage. At the very least, you should aim to raise a down payment of around 25% of the property’s value to secure a vacation rental mortgage.
If you can increase a deposit closer to the 40% mark, it will likely increase your chances of getting approved for the mortgage.
One way to increase the cash is to remortgage your current property, but only if you have enough equity to vacate your home. If the value of your current property has gone up and you’ve paid off a large portion of the mortgage, you can free up enough equity to put down a mortgage on a second home and use it on your vacation property.
Benefits of getting a mortgage for the holidays
Buying vacation rental property is an investment that takes commitment and persistence. However, if you can get a mortgage on your vacation rental property, the rental income can often exceed the returns you might expect from a purchase to rent a property long term. You can also benefit from a tax break which is no longer available for purchase to rent to owners.
If, for example, the property is fully furnished and managed as a vacation home, it may be considered a commercial enterprise. Thus, you may be eligible for tax relief on mortgage interest payments, as well as maintenance costs. And as with any other business activity, any loss incurred can be offset by future profits.
To receive most of the tax benefits, your vacation property must be available to rent for at least 210 days per year and be effectively rented for at least 105 days.
So if you wanted to use the house as your own vacation destination for a few weeks out of the year, you can still do that and get vacation property rental tax relief.
Conversely, if you sell the property for a profit, you will usually have to pay capital gains tax on the money you earn from the sale.
What to know before taking out a mortgage
Because mortgage lenders take far more precautions when it comes to vacation rentals, you’re much less likely to get mortgage approval to buy property overseas.
First, because it can be much more difficult to find vacationing occupants to regularly rent your property and provide you with the rental income you need.
Second, there is additional risk due to the fluctuation of foreign currencies, which could unexpectedly reduce the value of the property or the value of your rental income. Other risks associated with buying property abroad include ignorance of the local real estate market and real estate property laws in that country. This is why mortgage loans abroad are usually only offered by large banks with offices in the countries concerned.
Even when applying for a mortgage for vacation rentals in the UK there are still additional checks and stricter rules.
In addition to the rental income from your vacation property, many vacation mortgage providers will still expect you to receive significant income from your paycheck or elsewhere. If you’re already paying off a mortgage in addition to the one you hope to take out for a vacation home, that will also play a big role in how much you might be allowed to borrow.
For example, if your income is £ 50,000 a year, but you still have a mortgage of around £ 300,000 to pay on your primary residence, you are unlikely to be approved for a holiday mortgage. because your income will struggle to cover both the mortgage repayments.
So, first find out what the additional cost of a second home mortgage will be and if your finances can support it. Perhaps even better, compare these costs to your finances if you were to lose some of your income or incur significant unanticipated costs, such as roof repairs or stopping work due to illness.
If your finances are still able to cope and your credit rating is good, you might start looking for a vacation mortgage. Just be prepared to prove the rental income you can expect to earn by renting it out to vacationers.