What You Need To Know About Buying A Holiday Home
First, why might people want to buy a second holiday home?
“Many people want a second home to be 'mixed-use' i.e. they'd like to get a bit of rental income, but also use it for themselves and their friends and family. Of course, if the value increases with time, this is also a bonus. It can be difficult to find all of these elements in equal measure, so you will need to decide what is most important to you – it will make the process much simpler. If you’re looking for a rental investment, you might have different priorities than if you are just looking for a retreat for your own use. If gaining capital is your main interest, then it's likely you will choose a different destination than if it were for a retirement pad, for example.” – the Towergate Insurance team
How and where should you start the search?
“The first thing to establish is why you’re buying. Do you want a second home for you and your family to enjoy together year after year, and then pass on to the next generation as a legacy investment? Or are you seeking a steady income stream from a property that you want to let out now, and eventually sell on for a profit? If you fall into the first camp, it’s likely the property will be a more emotional purchase. Second home buyers tend to focus on areas they already know and love, perhaps because they’ve been there on holiday and want to put down some roots.” – Jonathan Hopper, CEO, Garrington Property Finders
“Your choice of holiday home ultimately depends on what you want from the property but being familiar with the area certainly helps, too. Access is one of the most important factors when considering where to buy a second home. Look into transportation services to the area, think about the road and rail systems and whether low-cost airlines operate in the area. Where you buy will depend on what kind of surroundings you are looking for, so consider the nightlife, food, scenery and so forth. And don't forget the weather – some places have good weather all year round, but some have low seasons where the shops and restaurants close down.” – the Towergate Insurance team
Are there any areas which are always popular?
“Many Londoners go south to Kent for an easy-access weekend getaway. The seaside towns of Margate and Broadstairs offer a mix of seaside nostalgia and a burgeoning café culture, with the bonus of fast, direct trains to London. Heading east out of London, the Suffolk Coast and Heaths is an Area of Outstanding Natural Beauty just a few miles from Ipswich, which also has fast train connections to London. Cornwall tops many people’s list of UK summer holiday destinations and it’s a hotspot for holiday homes. There’s a huge demand for self-catering accommodation, so you won’t struggle to rent your property to holidaymakers, either. Cornwall’s next-door neighbour, Devon is just as popular and a little closer to the rest of the country, while Salcombe has been voted the UK’s favourite coastal town. For vast windswept beaches, look to the north Norfolk coast or the north-east county of Northumberland. It may not have the look or feel of the Mediterranean, but its raw beauty is second-to-none. The rolling hills of the Cotswolds are the home of the quintessential English country cottage – if you want to make money from your second home investment, a holiday home here can generate up to £40,000 of income a year.” – the Strutt & Parker team
Does a holiday home always constitute a good investment?
“Holiday homes have become a popular investment for two key reasons. First, a property in a holiday hotspot can command high weekly rates. Second, it offers a home away from home for your family whenever the property is empty. During peak season (six weeks in the summer and two weeks over Christmas) rental prices can offset the running costs incurred during the other 44 weeks of the year. That said, holiday homes bring their own share of disadvantages, too. They can cost more in terms of upkeep and maintenance than other buy-to-let properties and you may need to enlist the help of a managing agency. The more you depend on the rental income to support your own financial situation will impact how you market the property. It’s up to you to decide whether the financial reward is worth the extra hassle.” – the Zurich team
If you do want to let the house out, what is there to think about?
“If you're planning to rent out your holiday home, this will inevitably lead to more maintenance costs than you'd experience otherwise – but on the other hand, it can result in a win-win situation in which your rental income covers overall maintenance costs. If you'd rather outsource the management of renting out your holiday home to a property management agency, you'll need to factor in these costs. This can vary considerably depending on where you holiday home is, but it is not uncommon for a holiday letting agent to take up to 25% from each rental. Although this may seem a large chunk of your income, once you've factored in the convenience and a (hopefully) guaranteed good service, you may find that this extra expense is worthwhile in the long term, as it'll free up your time and should result in better guest satisfaction and therefore more bookings.” – the Towergate Insurance team
“The single most important consideration is what the local holiday let market like. You really want somewhere where guest demand consistently outstrips the supply of properties to let. Speak to a professional buying agent or a holiday rental company about where the balance between demand and supply is most likely to tip in your favour. Don’t be overly swayed by talk of areas that are the ‘next big thing’. Demand for staycations has been exceptionally high during the pandemic but the current situation won’t last forever. Once overseas travel returns, demand patterns may return to more familiar territory. Properties that are ten miles inland will always be cheaper to buy, but harder to let, than those with a sea view. Get it right and it can be very lucrative. For example, a one-bedroom cabin in Cornwall with sea views that sold for around £550,000 is projected to generate a gross rental income of £85,000 a year.” – Jonathan
Is it possible to live in a holiday home all year round?
“UK law does not permit you to live in a holiday home for 12 months at a time – you’ll need to decide what your permanent address is for council tax reasons. Your council tax is lower on a secondary residence, so you could be a burden on local services if you were living in a holiday home all year round.” – the Towergate Insurance team
“With a second home (as opposed to a holiday let) there are no restrictions on how many days a year you can stay there. Clearly, you’ll need to choose somewhere that has enough space for your needs, and it may be worth considering somewhere that requires limited maintenance – that you can ‘lock and leave’ when you’re not there. If you’re buying as a holiday let investment, then yes, there are more factors to consider.” – Jonathan
How easy is it to get a mortgage on a second or holiday home?
“It’s easier to get a mortgage for a second home than it is a holiday let property. Loans for the latter are available, but there’s less choice as they tend to be the preserve of a few specialist lenders. Interest rates tend to be higher than those of a buy-to-let mortgage and you’ll typically need a deposit of at least 25%.” – Jonathan
“If you don’t plan on letting the property out (or only expect to do so occasionally), then yes, a second home mortgage is your best option. Beware, though, that you will need a large deposit – typically 35%. If buying abroad, you can either get your loan from a UK bank if they have a presence in the destination country, or through a local lender. If your holiday home is a business – i.e. you intend to let it out – you will need a holiday home mortgage. These aren’t available at most high street banks and are instead offered by some specialist building societies. Lenders will expect proof that you can make a gross income of 125-130% of your mortgage payment, so you need to do some research on the local lettings market to know whether that’s realistic. There are also strict rules about buy-to-let mortgages, so they aren’t always appropriate for holiday lets.” – the Towergate Insurance team
What kind of taxes are second properties and holiday lets subject to?
“If the property is located within the UK, tax will be charged on the purchase of a property. If you own other residential property or purchase it via a corporate wrapper, it will be subject to higher rates for additional dwellings (HRAD) – this is in addition to the standard land tax rates. If the property is located within England and Northern Ireland the HRAD rate for Stamp Duty Land Tax is 3% of the purchase price. The rates differ for properties located in Wales or Scotland.” – Natasha Heron, tax manager at Hillier Hopkins
“The tax treatment of the income you make from a holiday let property is still relatively favourable. If you have a mortgage on the property, you can offset your interest payments against the rental income you receive – thus reducing your income tax liability. This tax break no longer applies to buy-to-let properties, just to furnished holiday let properties. To qualify though, the property needs to be let out at least 105 days a year and available to let for at least 210 days.” – Jonathan
What are the differences with second properties purchased abroad?
“You need to pay UK stamp duty even when buying a holiday property abroad. There are always local purchase taxes in the country where you’re buying, and these will need to be paid as well. Rental income for the property will be paid to the authority that the property is situated in, and this will be deducted from your UK tax bill. It can make filling out a self-assessment tax return quite complicated, so it’s worth getting some professional help. Although an additional tax (on top of a country's equivalent of Capital Gains Tax) is rarer when you sell the property, it’s not unheard of. France, for example, has a 17.2% social levy on top of the 7.5% Capital Gains Tax on any profit you make on a sold property. Mortgage qualification criteria are also different, but it usually makes sense to get a local mortgage in the country in which you are purchasing the property (it’s usually the most cost-effective option). Talk to several mortgage brokers who specialise in second property mortgages to make sure that you meet the eligibility criteria.” – Chris Salmon, operations director at Quittance Legal Services
Has anything really changed on this front post-Brexit?
“As far as buying a property abroad is concerned, little has changed post Brexit. What has changed is the level of tax that you need to pay on rental income from said property. In most EU countries this has increased. Again, this makes purchasing a property abroad for investment reasons less attractive.” – Chris
Any final pieces of advice?
“Any property that is less frequented than a primary home has a higher risk of burglary. This is one of the reasons why a standard home that is empty for more than 30 days will usually require unoccupied home insurance. Renting out your property can help to reduce this risk, but comes with other risks such as burglars being able to easily scout out the coming and going of guests. It’s therefore extra important to take precautionary security measures when it comes to your holiday home. To avoid being unable make a successful claim in the event the worst does happen, make sure you understand the ins and outs of your holiday home insurance policy – and if you're unsure about anything, speak to an adviser.” – the Towergate Insurance team
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