A holiday let business is more than just a single rental property.
It typically includes multiple units or even an entire holiday park. If you’re looking to finance a holiday let business, specialist commercial finance is the way to go.
What do lenders class as a Holiday let Business?
It’s not just about occasionally renting out a property. HMRC, the UK’s tax authority, has specific criteria for Furnished Holiday Lets (FHL): properties available for at least 210 days a year and let for at least 105 days.
Historically, this distinction offered tax advantages, such as being able to claim certain capital allowances and deduct mortgage interest from rental profits.
However, the landscape is shifting. Changes announced in the Spring 2024 Budget will abolish the special tax regime for FHLs from April 2025.
This means FHLs will no longer qualify for certain tax benefits, such as Business Asset Disposal Relief (BADR), and mortgage interest deductions will be replaced with a 20% tax credit.
These changes might influence how some investors approach holiday lets, but the core criteria that lenders use to define a holiday let business remain the same:
- Scale: Multiple units, like those found in holiday parks, converted barns, or complexes with five or more self-contained accommodations, are key indicators.
- Purpose-Built: Properties with C3 planning permission, designated exclusively for holiday lets, are preferred.
- Income Potential: Lenders want to see a healthy projected income based on factors like location, property size, amenities, and local demand. If the business is already established, a track record of successful bookings is vital. For new ventures, a detailed business plan and professional valuation are essential.
- Your Expertise: While prior experience in the holiday let industry is valuable, it’s not mandatory. Lenders are often open to those with transferable skills and a well-thought-out business plan.
Even with the upcoming tax changes, investing in a holiday let business can still be a lucrative venture. An experienced broker can help you work through these changes and secure the right financing to make your business thrive.
Mortgages to buy a holiday letting business
Unlike traditional residential or even buy-to-let mortgages, financing a holiday let business requires a commercial mortgage. This is because lenders view these properties as businesses, not just investments.
Commercial mortgages are underwritten manually, meaning real people assess your application, not just computers and algorithms. These specialists understand the unique aspects of the holiday let industry and can tailor a loan to suit your specific needs.
Here’s what you can expect with a commercial mortgage:
- Flexible Loan Terms: Options for limited companies, SPVs, partnerships, and individuals.
- Repayment Choices: Typically, you’ll repay both capital and interest each month, but interest-only options may be available for new businesses.
- Loan-to-Value (LTV) Flexibility: Lenders may offer up to 75% LTV, but this can vary based on your experience, business plan, and property value.
- Competitive Interest Rates: While commercial mortgage rates are typically higher than residential rates, they can be surprisingly competitive.
To secure a commercial mortgage for your holiday let business, lenders will typically require the following:
- A Strong Business Plan: This should outline your vision for the business, who your target guests are, how you plan to market your property, and your financial projections. Think of it as your chance to show the lender that your holiday let business is a sound investment.
- Evidence of Your Ability: Lenders want to see that you have what it takes to run a successful business. This could be past experience in the holiday let industry or showcasing transferable skills from other areas. Highlight any relevant expertise or qualifications that demonstrate your ability to manage a property and deliver a great guest experience.
- Property Valuation: A professional valuation is essential to determine how much your property is worth. This helps the lender assess how much they’re willing to lend you.
- Financial Information: Lenders need to ensure you’re financially sound. They’ll usually ask for bank statements, tax returns, and any business accounts you have to get a clear picture of your financial situation.
Remember, partnering with an experienced mortgage broker who specialises in commercial lending can be invaluable. They can help you gather all the necessary documents, present your case to lenders, and find the best possible deal for your holiday let business.