Holiday Home Mortgages: Everything You Need to Know

Ever dreamt of owning a slice of paradise in a foreign land, a place where you can escape at a moment’s notice?  The UK mortgage market might just have the golden ticket for you with a ‘mortgage for a holiday home abroad.’ Holiday homes are becoming popular every day in UK households, as people take advantage of currency exchange rates and gain access to property prices that are much lower than in Britain.

Getting a mortgage for a holiday home abroad is quite different from getting one for a UK property. The most important difference is the lender. Mortgages for holiday homes abroad must be secured by an overseas lender, which can be a bank or other financial institution based in the country where the property is located. The lender will usually require a larger deposit than a UK mortgage and generally offer higher interest rates, as well as stricter terms and conditions.

It’s also worth noting that when it comes to tax implications for owning a holiday home overseas, there are various considerations to keep in mind. In some cases, HMRC may charge capital gains tax or stamp dutyA tax paid by the buyer when purchasing a property. on any profits you make when selling the property. Furthermore, if you rent out the property, you may also have to declare rental income on your tax return.

Finally, it’s important to consider the practical aspects of owning a holiday home abroad. This includes researching the local laws and customs of the country in question, as well as making sure you have adequate insurance cover for your holiday home and contents.

There are many ways in which you can is holiday home mortgages abroad, so it’s worth exploring your options to find the most suitable deal for you.

If the property is to be your main home, for instance, the lender will line up a residential mortgage for you as the owner-occupier and assess the affordability of the loan in terms of your income, job, outgoings, credit history, and so on.

If you are buying a property to let to paying guests, on the other hand, it is an entirely different ballgame as far as the mortgage lender is concerned. The lender is now interested in the business proposition of your buy to let plans, principally based on the rental income the property is likely to generate.

A holiday home mortgage appears to be a hybrid between these two. For part of the year, your holiday home might be used by you and your family as the owners of the property; at other times, it may be let to short-term tenants and holidaymakers.

According to figures released by the Ministry of Housing, Communities & Local Government in July 2023, 40.1% of all owners of second properties in the UK described them as holiday homes, while a further 33.5% described them as investment properties. This means that there are approximately 840,000 holiday homes and 750,000 investment properties in the UK.

What is a holiday home mortgage?

A holiday home mortgageA mortgage taken out on a holiday home or second home. is a type of mortgage that is designed to help people buy a property that will be used as a holiday let. Holiday lets are properties that are rented out to guests on a short-term basis, typically for a few weeks or less.

Holiday home mortgages are different from traditional buy-to-let mortgages in a few ways. First, holiday lets are typically seasonal businesses, meaning that they are only rented out for a few months of the year. This makes them a riskier investment for lenders, so they will typically require a higher deposit and have stricter lending criteria. Second, holiday lets are often located in popular tourist destinations, which can make them more expensive than traditional buy-to-let properties. If you are interested in getting a mortgage for a holiday home, we would suggest you contact our team of expert mortgage brokers to help you in getting a suitable deal. 

Can I use a buy-to-let mortgage for a holiday let?

Yes, you can also get a BTL mortgage for a holiday home. However, you may need to contact a specialist adviser to help you with the mortgage approval. Buy-to-let properties as holiday homes raise some concerns to mortgage lenders.

Your holiday home is likely to be let on a seasonal basis only rather than the longer-term, more predictable, assured shorthold tenancies typically associated with buy-to-let businesses. You may, therefore, find it more challenging to make the business case for your holiday let – and any prospective mortgage lender will need to investigate your financial circumstances and the potential for the let property to earn a steady income.

Can you get a mortgage on a holiday let?

Yes, as discussed above, you can get a mortgage on a holiday home property, but you may need to understand the rules and regulations of the country where the property is located. However, if you are purchasing a holiday home in the UK, you can get insights on regular mortgage rules.

How much can I borrow with a holiday let mortgage?

How much you can borrow depends on a whole host of factors relating to your own financial circumstances and the likely appeal of the property as a holiday let. Your projected rental income from holiday lets, of course, is a critical measure of the likely success of the business.

That measure is complicated by the fact that rental income is subject to – potentially extreme – seasonal variations (in contrast to the income from an assured shorthold tenancy, for instance). Your lender may calculate an anticipated rental income, therefore, based on the averages across low, mid, and high-season rates, with a stress test of potential variations and slumps in income influencing the rate of interest you might be offered.

What are the costs associated with a holiday let mortgage?

The principal cost is repayment of your holiday let mortgage, where the rate of interest you are offered is likely to make a significant impact. Those rates are typically higher than for either a standard residential mortgage or a buy-to-let mortgage – reflecting the increased risk of the transaction to the lender.

The cost of your mortgage repayments will also be determined by the size of the deposit you can offer and the price you paid for your second homeA property that is purchased as a second home or holiday hom....

As the HomeOwners Alliance (HOA) points out, you can offset the cost of mortgage interest repayments against your rental income as far as your income tax liabilities are concerned.

Furthermore, there are also special tax rules which apply to your income from a holiday let if it is left furnished. It must be furnished to allow “normal occupation” and be available as a holiday letting for at least 210 days of the year. These rules could be updated and it is always better to consult a mortgage broker to help you with any mortgage approval process. 

The costs of maintaining and keeping your second home in a good state of repair may prove more expensive than you imagined. At the same time, you must also take into account ongoing expenses such as insurance, council tax, and utilities, plus lettings and management agency fees.

Can I get a holiday let mortgage with bad credit?

While it is by no means impossible to secure a holiday let mortgage if you have a bad credit history, you are almost certain to find it difficult – with a limited pool of potential lenders.

Whatever type of mortgage you want to borrow, bad credit gets you off the wrong foot. For a holiday let mortgage, you are likely to be even more disadvantaged since you are competing for a relatively rare niche product.

A mortgage adviser specialising in applicants with bad credit and with expertise and experience in the market for holiday let properties may be able to offer help and guidance.

What about holiday let mortgages for overseas property?

If you want to buy a second home abroad, you may also need a holiday let mortgage. In that case, you have broadly two options – to arrange a mortgage through a local bank or lender in the country where you are looking to buy or arrange an overseas mortgage with a UK lender.

If you chose local finance, you must be prepared to negotiate the potentially arcane rules and practices of your host country in a language with which you may not be perfectly fluent. You are also at far greater mercy of fluctuating foreign exchange rates.

A safer bet, therefore, might be to contact a holiday home mortgage broker who will find the most appropriate deal for you from one of the several UK lenders now specialising in overseas mortgages.

What about if I want to purchase a holiday home in the UK?

If you are looking to purchase a holiday home within the UK, there are several options available to you. You can take out a mortgage with a traditional lender or through a specialist holiday home provider. If you go down this route, you will need to provide evidence of affordability and have suitable security against which the loan can be secured.

Which one is more beneficial, buying a holiday home in the UK or abroad?

Purchasing a holiday home in the UK or abroad, both have different merits. For anyone looking to purchase a holiday home abroad, a mortgage may be the best option. Mortgages for holiday homes abroad are available from most banks and lenders. Before securing a mortgage, it is important to understand the regulations surrounding foreign mortgages. However, if you are purchasing a holiday home within the UK, it will be much easier to get a better mortgage deal. 

Next Steps

Getting a mortgage for a holiday home abroad is complicated and comes with challenges, but it can be a rewarding experience. There are many benefits to owning a holiday home in a country like Italy, France, or Germany, such as:

• Enjoying the local culture and cuisine.
• Exploring the region’s history and attractions.
• Making new friends and connections.
• Generating passive income from renting out the property.
• Building equityThe difference between the value of the property and the amo... in an asset that can appreciate in value over time.

Of course, there are also some risks to consider, such as the cost of maintenance and repairs, the potential for fluctuations in the local market, and the challenges of managing a property from a distance. However, if you are willing to put in the effort, owning a holiday home abroad can be a great way to enjoy your travels and create lasting memories.

As a specialist mortgage broker for holiday home purchases, we can help you with the application process.

FAQs

What is a ‘mortgage for a holiday home abroad’ and how does it work?

A ‘mortgage for a holiday home abroad’ refers to a type of mortgage product tailored for individuals looking to purchase a holiday home in a foreign country. This type of mortgage involves working with overseas lenders to secure a loan for the property purchase. It is essential to work closely with an overseas mortgage broker and a specialist mortgage broker in the UK to find the best mortgage deal that suits your needs.

How do currency exchange rate fluctuations affect my overseas mortgage?

Exchange rate fluctuations can affect both your mortgage payment and the overall mortgage cost. It is essential to keep a close eye on exchange rates to ensure you get the best value. Engaging a financial adviser for expert advice on managing exchange rate fluctuation could be beneficial.

What are the tax implications of owning a holiday home abroad?

Owning a holiday home abroad can have several tax implications, including potential liability for capital gains tax and stamp duty surcharge on the property purchase. It’s recommended to seek legal advice and professional advice to understand the tax laws applicable to your overseas property in both the UK and the country where the property is located.

Can I get an overseas mortgage from a UK bank or should I approach a foreign bank?

You can approach a UK street bank for an international mortgage, but they might have stringent lending criteria and may offer you a less competitive mortgage rate compared to a foreign bank. Collaborating with an overseas mortgage broker can help you navigate through various mortgage products available from both UK and international lenders.

How do I determine the rental income potential of a holiday home abroad?

To gauge the rental income potential, consider factors like the property’s location, nearby attractions, and seasonal demand. Working with a local estate agent can give you a more accurate estimate. Remember, the rental income can help you manage your monthly mortgage repayment efficiently.

What type of insurance do I need for my holiday home?

Insuring your holiday home is vital. Ensure that your policy covers the contents of the home, rental property protection, and covers you against potential damages incurred by tenants or natural calamities. Seek expert advice to find a policy that suits your needs.

How can a mortgage calculator assist me in planning my finances?

A mortgage calculator can help you estimate your monthly mortgage repayment based on various factors like purchase price, mortgage term, and interest rate. It gives you an idea of the monthly financial commitment involved in owning a holiday home.

Can I buy a furnished holiday home abroad?

Yes, you can buy a furnished holiday home. It might even have tax benefits under furnished holiday let rules, but conditions apply, which involve the home being available for letting for a set number of days per year. Always consult a tax adviser for personalized financial advice.

Can I rent out my holiday home when I am not using it?

Yes, renting out your holiday home can help you generate additional income to offset mortgageA mortgage where the borrower's savings are offset against t... interest payments and other associated costs. However, you must declare this income for income tax purposes.

Are there specific mortgage products for holiday lets?

Yes, there are specific mortgage products designed for holiday lets which have different criteria compared to standard mortgages. A mortgage adviser can guide you to find the most suitable product for your needs.

Can I secure a mortgage if I have a bad credit history?

Securing a mortgage with a bad credit score can be challenging. However, some specialist lenders might be willing to offer you a mortgage product. It’s advisable to consult with a specialist mortgage broker to explore your options.

What should be my first step in the mortgage application process?

Before you start the mortgage application process, get an understanding of your credit score annual or joint income, and gather all necessary documents to substantiate your financial stability. Also, decide on the type of property you wish to buy and the country where you intend to make the purchase. Getting pre-approval can be a wise first step to understanding your mortgage affordability.