The rise of the ‘staycation’ has been one of the few positives to come out of the Covid-19 pandemic.
With the coronavirus effectively making mass foreign holiday a temporary impossibility, Brits have been quietly surprised to find that a good time can actually be had in their own green and pleasant land.
The rise of the short-term let and holiday let markets has led to opportunities for landlords to generate stronger yields as the ‘staycation’ boom continues to increase demand.
At Hampshire Trust Bank (HTB) we have certainly seen a noticeable rise in the number of landlords wanting to take advantage of this trend but it’s important to point out that this remains a complex area for landlords.
Essentially, a holiday let mortgage is used to purchase a property that can be let out to tourists and visitors on a short-term basis. A mortgage for a holiday let is a specific loan designed purely for investment purposes.
There are key considerations to be made with this product type. For example, to achieve preferential tax treatment, a holiday let must be available for letting to guests for at least 210 days (30 weeks) per year and the property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days available.
The much higher potential for yield over a shorter period of time is what makes this an attractive option for investors.
Holiday lets can earn in a week as much as a standard buy-to-let on an AST can in a month. Of course, high returns and high demand are to be welcomed but it’s important for landlords to remember that performance can be seasonal and affected by the less than predictable weather (remember those two named storms within 10 days in August 2020? I know campers who do and have the mental scars to prove it!)
On a positive note, the average cost of fixed-rate mortgage deals available on holiday lets is becoming more competitive. In January 2022 borrowers would pay an average rate of 3.92%, down from 4.14% in September 2021.
However, it’s important to remember that the government is working to close a loophole which allows people to avoid tax by claiming their often-empty properties are holiday lets.
The crackdown will see holiday lets having to be rented out for at least 70 days a year to qualify for small business rates relief – and owners will have to prove this when the new rules come into place next year.
Holiday let owners need to be cognisant of location, occupancy rates and seasonality and landlords must carefully weigh up tax benefits, understand localised rules on holiday lets and residency periods.
They also need to appreciate how rental yield is calculated; a ‘bog standard’ AST doesn’t always support this kind of borrowing.
Questions also need to be asked by landlords in terms of if, when and how easy it is to switch a property back into being a single family dwelling in case Brits decide en masse to holiday abroad again.
The advice process remains crucial as approaches to holiday lets continue to vary from lender to lender. For example, most lenders won’t lend to first-time buyers on a holiday let.
Meanwhile, the short-term let market continues to capture the attention of landlords and looking beyond holiday lets, there are other short-term scenarios to consider.
For example, contractors working at nearby sites for extended periods, or families needing a short-term base for a couple of months through a property licence.
These are just two instances that we, as a lender, can consider when meeting ICRs and these types of common sense criteria adjustments are leading to increasing numbers of landlords appreciating the flexibility and yield of short-term lets.
They can be even more lucrative than holiday lets; for example, when located in the right place at an optimal time of year, a short-term let can earn four or five times the amount a standard buy-to-let property on an AST can make in a month. If that doesn’t pique the interest of property investors then I’m not sure what will.
Whether the Covid crisis will lead to a permanent change in holidaying habits is yet to be seen; however, in the short-term there are no signs that the staycation boom is over and at HTB we’re continuing to support those who’ve done their homework and want to profit from the domestic market. That way, we can all have a happy and fruitful holiday time.
Louisa Sedgwick is managing director for specialist mortgages at Hampshire Trust Bank
