financing for a Holiday home?

latecomer

I've got a fairly good understanding of mortgages etc but I'm coming a little unstuck with something at the moment. I'm struggling to see how holiday home finances work - I just dont see how it stacks up.

We potentially could to be mortgage free in the near future and are starting to look at possible investments -


Scenario:
We recently stayed somewhere which is valued at approx £300,000 and it started us thinking (and speaking to local letting agents etc)

house cost £300,000
deposit £150,000
£150,000 BTL mortgage at ~6% - £9,000 per year (interest only)

week rent on house - £800
rented 20 weeks per year (once established) - £16,000

Difference - £7,000 excess before any costs

Costs
council tax - £2000
heating and electric - £1200
cleaning £60x20 - £1200
insurance - ?
maintenance - ?

etc

very quickly it appears like its just not something thats financially viable - obviously you want to either pay off the mortgage or get a return on your investment

So how do people make it work? Does it only make sense if you have no mortgage, set up a company for tax purposes, something else?

Thanks in advance

antrobus

latecomer wrote: »

So how do people make it work?

They're sufficiently wealthy to own two homes. Or they're an MP.

I know that's not particularly helpful, but that is generally speaking how it works for holiday homes. There are people who simply can afford to buy and run two homes.

silvercar

Standard BTL mortgages are designed for residential letting not holiday homes.

Easiest way is cash or savings.

Next easiest option is to increase the mortgage on your main home to fund the purchase.

Some foreign banks operating in the UK are meant to be quite good for holiday home mortgages as they have products designed for people in the UK buying a second home overseas.

very quickly it appears like its just not something thats financially viable - obviously you want to either pay off the mortgage or get a return on your investment

So how do people make it work?

You need to be clear in your own mind whether you are doing this as a commercial venture or it whether it is a lifestyle choice for you and the lettings are a way of helping to finance it.

Chris55_2

There are a couple of other factors to consider... one is that if it is run as a business and meets the requirements then it will be business rates rather than council tax - and this can be a considerable saving. The mortgage interest would also be tax deductible (and in the past people have been able to offset that against other earnings).

On the negative side there also the marketing costs. If you go with one of the established companies it could be around 30% of your potential weekly take.

We own a second home, bought with an inheritance about 8 years ago. Somewhat smaller and cheaper than yours - but costs us around £3000 a year (hopefully sold as of October).

Most people we know holiday letting have acquired the property either by inheriting, or by developing (i.e. buying something in need of work, or restricted to holiday home use), converting an existing building (e.g. farm building). From what we hear business is not very good this year.

latecomer

Chris55 wrote: »

There are a couple of other factors to consider... one is that if it is run as a business and meets the requirements then it will be business rates rather than council tax - and this can be a considerable saving. The mortgage interest would also be tax deductible (and in the past people have been able to offset that against other earnings).

On the negative side there also the marketing costs. If you go with one of the established companies it could be around 30% of your potential weekly take.

We own a second home, bought with an inheritance about 8 years ago. Somewhat smaller and cheaper than yours - but costs us around £3000 a year (hopefully sold as of October).

Most people we know holiday letting have acquired the property either by inheriting, or by developing (i.e. buying something in need of work, or restricted to holiday home use), converting an existing building (e.g. farm building). From what we hear business is not very good this year.

Thanks for that - very interesting. Its very much just a thought at the moment - one of several.

We dont mind it costing us money within reason (and provided it was paying off capital) as it may also be used as an alternative to topping up a pension and hence would be planned to be wholly owned by retirement age - in approx 30 years.

The marketing costs for the local agency we spoke to were 22.5% plus vat and various other costs in addition to this.

latecomer

silvercar wrote: »

You need to be clear in your own mind whether you are doing this as a commercial venture or it whether it is a lifestyle choice for you and the lettings are a way of helping to finance it.

It would be more the latter - and also an alternative to topping up a pension if it made sense financially. Hence this thread

Thrugelmir

latecomer wrote: »

We dont mind it costing us money within reason (and provided it was paying off capital) as it may also be used as an alternative to topping up a pension and hence would be planned to be wholly owned by retirement age - in approx 30 years.

A holiday home is not treated in the same way for tax purposes as a BTL.

There is legislation that could impact from April 2012.

Below is a summary.

Proposed revisions
The law will be changed by Finance Bill 2011 so that:
• FHL in both the UK and EEA will be eligible as qualifying FHL within the (revised) special tax
rules. This is the current situation but is not within the legislation;
• the minimum period over which a qualifying property must be available for letting to the
public in the relevant period is increased from 140 days to 210 days in a year with effect
from April 2012;
• the minimum period over which a qualifying property is actually let to the public in the
relevant period is increased from 70 days to 105 days in a year with effect from April 2012;
• losses made in a qualifying UK or EEA furnished holiday lettings business may only be set
against income from the same UK or EEA furnished holiday lettings business; and
• a “period of grace” will be introduced to allow businesses that don’t continue to meet the
“actually let” requirement for one or two years to elect to continue to qualify throughout
that period.

*Summertime*

I am 28 and have a holiday home - I bought off plan 3 years ago and had no experience whatsoever in what I was doing. I have and am still 'winging it'.

I don't know if it will turn out to be a good decision or bad one. All I know is I have no pension funds and this is it - a long term investment. At the moment it is rented out and I have to hope that continues.

Me and my husband live to a VERY tight budget which is not always fun but, all being well in 10 years time we will have a mortgage free home abroad which will form some/all of our income when we retire.

No advice for you just my story so far... Good luck with what you decide!!

silvercar

Thrugelmir wrote: »

A holiday home is not treated in the same way for tax purposes as a BTL.

There is legislation that could impact from April 2012.

So a few more hoops to jump through. If it qualifies it means that you can put any losses you make against earned income ie what you spend on the holiday home can be used to reduce your overall tax bill.

If it doesn't qualify it means that any losses can only be put against other rental income and not general income (PAYE, SE or savings).

If you make a profit on the rental then you pay tax on it, but if you are not renting it out that much it will be harder to make a profit.

silvercar

latecomer wrote: »

Thanks for that - very interesting. Its very much just a thought at the moment - one of several.

We dont mind it costing us money within reason (and provided it was paying off capital) as it may also be used as an alternative to topping up a pension and hence would be planned to be wholly owned by retirement age - in approx 30 years.

latecomer wrote: »

It would be more the latter - and also an alternative to topping up a pension if it made sense financially. Hence this thread

Same here, we intend renting it out some of the time to help pay some of the bills on it, but the main use is as a holiday home.

Thrugelmir

silvercar wrote: »

If it doesn't qualify it means that any losses can only be put against other rental income and not general income (PAYE, SE or savings).

Unfortunately not.

Whether unfurnished, furnished or holiday lettings, they are known as property businesses and their profits are broadly calculated on the same basis as trading activities.

However the Inland Revenue do not accept that such property businesses are trading activities and any losses incurred are not normally deductible against other sources of income such as salary,