Deciding whether you should invest in a buy to let or holiday let is an important decision to make when making a property investment decsison. There is no doubt both offer certain benefits but it’s important you clearly understand the buy to let and holiday market is distinctly different. And yet it regularly gets merged as one by property investors when it comes to getting a mortgage! Let me explain and tell you why it’s important not to confuse the two when mortgages are concerned.
It is not uncommon for those who currently rent a property on an AST (assured shorhold tenancy) basis and who have a buy to let mortgage to consider changing their business model from long term lets to short term (holiday lets). Afterall, if their property is in the right location they might be able to get a higher return so why shouldn’t they? It all makes complete sense, the problem begins when they don’t think this change of use matters to the mortgage company!
As far as many property investors who are faced with this consideration are concerened the property is an investment property. Whether it is let out for a long term, holiday let, HMO (or anything else for that matter) their primary concern is maximising their returns. However, the reality is, this is fine if the person has no mortgage on the property, they can do what they want. However, it’s vital you understand that if you do have a mortgage (or considering getting one), then these changes and the type of letting you plan to do matters a great deal to lenders. If you have a buy to let mortgage, you can’t just switch your business model to holiday letting without informing the lender and getting their permission to do so.
You might find this pedantic or not really that important. But trust me if a lender finds out you are doing something you shouldn’t and they don’t like it, they can call in the loan as you’ve broken the mortgage conditions with which they originally agreed to lend you the money. In effect this means you’ll either have to repay the whole mortgage or be told you have to remortgage somewhere else. We’ve seen this happen in St Ives where a particular lender did some digging only to discover a lot of their buy to let loan book in the area was being used for holiday lets which they didn’t like and didn’t lend on. And yes, lenders do check to see what you are doing!
The reality is, if a lender is deciding whether to lend money to you, they want to know what the purpose of the investment is because there are assessing risk as buy to lets are very different business models to holiday lets. Each lender will have a different appetite to lend on different types of property investing. Not all will do holiday lets and if they do, they might deem it riskier and therefore price it higher. It is vital to make sure the property usage is aligned with the correct finance. Below is a little video I did a while ago, but of course, things do change.
Clearly, they are very distinct markets and one thing is for sure, the buy to let market is more hands-off than the holiday let sector (unless you outsource changeovers, cleaners, marketing etc) which might be important for you. However although you might want a hands-off approach, the returns on holiday lets can be more and the tax changes might make it more appealing. So weighing up whether a buy to let or holiday let is right for you, might come down to the figures. Speaking of which Property Insights is a great resource for comparing yields in different areas. But like all of these things, the figures will be dependent on the type of property you have, its location and the type of business you intend to run.
However, it is vital you don’t just focus on the figures, but the type of investor you want to be and if you go down the holiday let route, the practicalities of running one. If you are planning to do the work yourself, you’ll be surprised how hard it is and how much time it can take to manage a holiday let. If you are planning to outsource the work, then make sure you research the costs thoroughly and don’t forget about the void periods. Most holiday lets will never have 100% occupancy so make sure you plan for this too.
Whatever you do, don’t just dive into one or the other without doing a lot of research and due diligence. Speaking to mortgage brokers like us who have experience in both and work with lots of different types of investors, might help you focus on the right sector for you.
Good luck 🙂