Lenders are returning to the market and expanding their product ranges, suggesting they too regard short-term rentals as a solid investment. Meanwhile, brokers specialising in this sector report being busier than ever, and many advisers who have not traditionally focused on this area of the market are seeing it become a growing part of their business.

Moneyfacts personal finance expert Eleanor Williams says: “As uncertainty around overseas travel continues, the holiday-let mortgage market has continued to flourish. Both the number of products available to investors considering a holiday let and the number of providers catering to this demographic have risen since the start of April. Indeed, there are now more lenders offering these products than before the start of the pandemic.”

Figures from the price comparison website show that the number of products available for short-term rentals has more than doubled, from 74 last August to 156 at the time of writing, which is just below the level seen before the pandemic struck in March 2020, when there were 162 deals available. There are now 23 lenders in this space, up from 20 in March last year. But the sticking point for investors remains the cost of borrowing, with the average rate now at 3.95% compared to 3.37% pre-Covid.

Criteria

In terms of criteria, Ipswich Building Society is offering the highest loan-to-value tier at up to 80%, with a rate of 4.1% for a two-year fix and a fee of £1,149. For those with larger deposits, the cheapest deal is from Furness Building Society, at 3.19% for a two-year discount rate at 65% LTV with a £995 fee.

Aside from Hodge, InterBay Commercial and West One, most other lenders active in the holiday-let market are building societies, which include Cambridge, Cumberland, Leeds, Market Harborough, Monmouthshire and Principality. Some have only recently returned after a hiatus during the pandemic.

The Tipton & Coseley offers a holiday-home mortgage, which unlike the others is classed as a residential loan and geared to borrowers who want to stay in the property themselves. It has a discounted three-year deal at 2.74% up to 75% LTV, but specifies that borrowers must not let their property permanently. Affordability is based on the applicant’s income rather than the property’s rental value and the lender specifies the holiday home must be “close” to the borrower’s main address.

In a further sign of rising demand from buyers, the average price of a holiday home increased by 12% in just six months, from £387,993 in October 2020 to £435,476 in March 2021, according to Hodge. The lender also saw a 30% jump in holiday-let mortgage applications over the same period. The most popular destination for holiday-home buyers was the Southwest, at 39% of mortgage applicants, followed by Wales at 19% and the Northwest at 12%.

House & Holiday Home Mortgages director Mark Stallard says his experience reflects this trend.

“It is crazy busy — the busiest I have ever known. I’m hearing of people buying properties they haven’t even been to view because competition is so strong. The types of enquiry we are getting are diverse; some are easy and others extremely complicated. You might have houses with annexes; buyers who have never been a landlord; those who don’t even own a property yet; two houses on a single title; or expats trying to purchase.”

Stallard says he is seeing a wide geographic spread, with the usual hotspots of Devon and Cornwall maintaining their popularity alongside the Cotswolds and the Lake District. But there are also people interested in buying second homes in less obvious destinations, particularly where they may have a personal connection to an area.

For Stallard, familiarity with both the sector and lender criteria is key.

“There are many variables and relatively few lenders,” he says. “Most have a background in the residential market rather than commercial so they tend to be fairly conservative about risks. Some investors are looking at holiday lets as the new buy-to-let [BTL], but there are caveats: it is hard work and it is not all jam.

“You have to factor in management costs and there are other issues; for example, we are hearing that it is very difficult to get cleaners in some parts of the country. We try to talk our clients through the whole experience rather than just saying ‘Here is the mortgage for you.’

“When it comes to finding the right lender you have to know what you are doing because there are so many rabbit holes you can fall down and you are dealing with a very anxious, expectant, excited customer.”

Favourable tax treatment

One of the reasons so many investors are looking at short-term rentals is the tax treatment. The clampdown on tax relief for landlords offering standard tenancies has prompted some to look elsewhere for the best yields. For properties that meet HM Revenue & Customs’ definition of a furnished holiday let, investors can offset mortgage interest and other costs such as energy bills, gardening and cleaning against their profits to reduce their tax bill.

To qualify for the relief, the property must be available to let to holidaymakers for at least 30 weeks a year and it must be let for a minimum of 15 weeks a year. Lets of more than 31 days cannot be included. Investors can claim capital allowances for the cost of decorating and furnishing their property and they may qualify for certain capital gains tax reliefs when they come to sell. In most cases, holiday-let owners are likely to be liable for business rates rather than council tax, although certain reliefs may apply.

However, those jumping headfirst into the world of holiday rentals should be mindful of the threat of further regulation. London has already restricted short-term lets to 90 nights a year, with platforms like Airbnb automatically blocking landlords from exceeding this unless they have an exemption from their local authority. The rule does not apply to those renting out a room in their own home, but rather to those leasing entire properties.

Meanwhile, the Scottish government is working on regulations to give councils the power to designate controlled areas in which landlords would require planning permission for a change of use in order to rent out property on a short-term basis.

The subject is likely to remain controversial as the supply of affordable homes across the UK remains under pressure. Councils face a difficult balancing act between competing needs. On one hand they want to support local businesses by encouraging tourism, particularly after the economic damage wreaked by Covid. On the other they need to ensure there are plenty of long-term rentals available to local residents, as well as homes that first-time buyers can afford.

The potential for future housing policy to curb short-term lets does not seem to be deterring buyers. Holiday Cottage Mortgages director Andrew Soye says business is up by around 30% on what he would expect at this time of year.

“We are seeing lots of interest in the classic locations, with huge demand for Cornwall, Devon and the Lake District, as well as areas where your money goes a lot further such as the Northumberland coast and Pembrokeshire,” he says.

Soye launched the brokerage after co-founding a luxury holiday rental business, which was sold to Sykes Cottages. It was while running this earlier venture that he came to understand the difficulties of obtaining finance for short-term rentals and saw an opportunity to make a mark in this specialist area of advice.

He says a lot of holiday-let buyers are self-employed, adding an extra layer of complexity to the mortgage process. He estimates that more than half of his clients fall into this category, ranging from freelancers working in media to savvy builders who have a knack for making money out of property. On the employed side, holiday rentals hold huge appeal for wealthy individuals, from NHS consultants to City heavyweights.

“We get some real big hitters, so I’m never surprised to see the CEO of a big company or a partner in a Magic Circle law firm.”

Client categories

Property Master chief executive Angus Stewart says there are two main categories of client: those looking at holiday rentals from a purely investment perspective as an alternative to BTL, and those who primarily want a second home but would also like to generate some income.

“I encourage clients to ensure they go into it with their head rather than their heart,” says Stewart, “and looking at the proposition from a business perspective rather than being too swayed by where they would like to spend a few weeks of the year on holiday. Some places you might be emotionally attached to but other people might find a bit isolated or not appreciate in the same way.”

Another broker who has seen a flurry of holiday-let enquiries is Lloyd Wells Mortgages director Adam Wells. As the company is based in Bristol it is well placed for city dwellers looking to invest in Somerset and Devon.

Wells says: “People are looking at holiday lets because the yields can be so much higher than traditional BTL, plus most lenders allow you to stay in the property for 60 or 90 days yourself. The fact you can get agents to manage all aspects of the lettings side also appeals.”

For years the scarcity of holiday-let mortgages has been at odds with the popularity of sites like Airbnb among travellers. Now that product choice is improving and lenders seem more comfortable with the risks, that could be about to change.

Much will depend on how soon foreign travel can resume in earnest. If UK holiday-home investors were to get burned by a sudden resurgence in Brits venturing abroad, it could dent confidence in the sector and prompt a retreat. Yet many expect foreign travel to be restricted for some time as countries grapple with new variants of the virus and unequal access to vaccines.

Homebuyers and holidaymakers alike may therefore take comfort in resting on home shores.