Guide to Rental Mortgages for Vacation Rentals and Homes

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  • This mortgage buying guide will help you if you are considering buying a second home or vacation property. If you are lucky enough to be able to do this, you can rent it out to paying guests to increase your income.

    More than 770,000 families in England own a second home according to the English Housing Survey 2018-19, the most recent year for which official statistics are available. Of these, nearly 40% use their second home as a vacation home for themselves, friends or to rent to vacationers.

    It is not difficult to understand why. You can earn thousands of pounds each year depending on the charm and location of your holiday home. It could be an investment that generates regular income and long-term gains, if house prices rise. Or the income could help you cover the cost of a mortgage on the property, while leaving you free to enjoy it at other times.

    Guide to Rental Mortgages for Vacation Rentals and Homes

    If you’re keen to make some money with your country hideaway or city base, here are some helpful tips to get you started.

    Choose your property and its location

    Scenic destinations with year-round appeal that are accessible to large populations such as the Peak and Lake Districts and the Cotswolds are a win for holidaymakers. North Wales and the Welsh borders are also popular locations, according to Luxurycottages.com.

    Think about how easy it is to get to your property using different transport links and how close your home is to attractions or the coast. If your home is near a beach or within walking distance of tourist sites, you can charge more.

    City lovers may want to invest in an urban pad. Last year, an analysis by Vanquis revealed that the three most profitable cities to be an Airbnb owner were Cardiff, Belfast and Manchester.

    Image credit: Future PLC/Anya Rice

    Personal touches and premium customers

    You will have to go the extra mile to attract quality customers and charge a premium. Vacation homes positioned as high-end getaways can generate up to 2.5 times the revenue of a standard property.

    General Manager of Luxurycottages.com Alistair Malins says: “Every guest wants to feel special when they are away and thoughtful little touches like a basket of local produce or a bottle of wine on arrival really help set the tone for their stay.

    “Being able to enjoy some of the luxuries you don’t have at home, like a hot tub, sauna, or warming up by a wood-burning stove, all adds to the authentic experience of staying in a luxury home. “

    Set your rates

    Talk to local rental agents to find out the going rate for properties like yours. Ask how long the booking season lasts and what rates you can apply in high and low season. However, how much you can charge will partly depend on the quality of your online reviews.

    In your first year before getting reviews, you may want to offer your property at a discount to attract vacationers and rack up positive reviews.

    Your property is not always rented, especially outside holiday periods. So if you have a mortgage on the house that you expect to pay off from rental income, factor in some gap periods into your calculations.

    Advertise your vacation home

    Airbnb is one of the most popular platforms used by vacation home owners. You pay around 3% per booking to use the website. You must manage your own reservations and answer customer questions. Similar websites include Booking.com, Cottages.com, and VRBO.com, formerly known as HomeAway.

    An alternative is to pay a real estate agent to market your property, handle guest administration and maximize rentals for you. Agents tend to charge between 15% and 20% of each booking.

    A gray sofa in a living room with a large wooden coffee table and green wallpaper

    Image credit: Future PLC

    Tax treatment

    The income you derive from renting out your holiday home is taxable. You will need to report it on your annual tax return. You will then pay income tax at 20%, 40% or 45% depending on whether you are a taxpayer at the basic rate, at the higher rate or at the additional rate.

    Luckily, you can enjoy a host of tax benefits on your vacation home if it complies with the rules for furnished vacation rentals. The main rules to remember are that it must be available for rent for at least 210 days per year and for rent to paying customers for 105 days per year.

    If you meet the conditions, you can deduct from your pre-tax income expenses such as:

    • Mortgage interest charges
    • Advertising or property management costs
    • Cleaning and maintenance
    • Utility bills
    • Welcome Pack Items
    • Insurance premiums

    You are also entitled to tax relief on items such as furniture, fixtures and fittings purchased to increase the value of your holiday home.

    Setting up your vacation home in the first year can be expensive. Don’t worry though, you can carry forward any loss to the next tax year for tax purposes.

    Here are some other tax benefits:

    1. Small Business Rate Relief – owners of seasonal rentals must register for professional rates rather than housing tax. However, you may be eligible for small business rate relief, which means you pay nothing at all. Call your town hall to find out if you are exempt.
    2. Wear allowance – you can claim tax relief on household items that you have replaced because they are no longer usable.
    3. pension contributions – the profits you make from your holiday home are eligible for additional government tax when paid into your pension pool.
    4. Capital gains tax – when you sell your property, you may be eligible for contractor relief, rollover relief, or holdback relief.

    It is advisable to speak to an accountant for tax advice.

    Mortgage and insurance specialist

    You will need a specialized holiday mortgage which usually requires a 25% down payment. It’s best to talk to a mortgage broker who can find you the best mortgage rates for your situation. Specialized insurance is also essential. Regular home insurance will not cover your needs as there is an increased risk of damage and theft.

    You may also want liability coverage, which insures you if a guest is injured at your property. Price comparators will allow you to search for specialized covers.

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