“Possible Brexit scenarios could mean many people have less money to travel abroad and choose to holiday closer to home,” Andrew Turner, chief executive at Commercial Trust, said.
“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.”
With this in mind, he argued that landlords who use their rental homes as holiday lets could potentially do very well following Brexit, as a result of growing demand.
Why choose a holiday let?
Furnished holiday lets (FHL) are seen as businesses by HM Revenue & Customs (HMRC) and, therefore, the tax treatment is different to traditional buy-to-let income.
FHLs also benefit from not being impacted by the changes to buy-to-let mortgage interest tax relief. This means that an FHL landlord can still claim 100% of the interest paid on their mortgage. Income from FHLs can also be invested into a pension, where it may benefit from tax relief under present law.
Furthermore, an FHL landlord can 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 revealed that FHLs had an average net yield of 6.1%, compared with 5% for residential buy-to-lets.
It also stated that the average weekly income on a holiday let was £563, whilst a typical buy-to-let income was £161.
Some lenders will also allow the landlord to live in the property for a restricted proportion of each year, which is something that is not permitted with buy-to-let.
Things to be aware of
Commercial Trust Limited said those looking to enter the holiday lets market should still exercise caution.
It said to bear in mind the seasonality associated with holiday lets and that landlords should have a realistic picture of occupancy when planning the amount they will charge for their property. Local research and input from a holiday letting agent may help with this.
Also, lenders consider the risk of void periods and therefore the rates they offer on FHLs. Landlords should ensure they have a clear picture of rates from across the market and specify that they are looking for a holiday let product.
Landlords should also expect to invest a minimum deposit of 25% of the property value.
A lender will consider an enhanced loan-to-value (LTV) if a landlord has owned an FHL for some time and can provide evidence of rental income.
Commercial Trust advises landlords that they should prepare a plan for handling enquiries, turning round the property between lets and advertising the property in question. For those who want to take more of a backseat, outsourcing hands-on work could be an option. Landlords should 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 will need to be proven.
They 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.
Additionally, lenders will set a minimum number of days each year when the property must be available for letting; typically, they will set a minimum number of days per year that it is let out for.
Brexit could lead to more opportunity
As the holiday lets market continues to grow, lenders 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 grown to 15 now, with a wider range of product choice.
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.
Although Brexit’s outcome remains uncertain, it could be the catalyst for more opportunity over the coming months.