Holiday home finance
From budgeting for your property purchase to declaring your taxable rental income there's a lot of financial aspects involved in owning a holiday home. The following will give you an idea of what you need to know.
Know your limits
Budgeting for your holiday home purchase is all about setting a maximum price limit and sticking to it. Remember you need to include the following costs in your maximum purchase price:
Running wild
Before you take the plunge you will also need to consider the running costs of your holiday home, including:
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Possible costs:
Management charges Agency fees Marketing costs
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Reap the rewards
You will also need to work out whether the potential rental income of your property is economically viable. To do this calculate your return on investment (ROI) - divide your annual potential rental income by the value of your property. This will give you a gross figure, but to calculate the net yield subtract your overheads from the property value first.
For example, if your property is worth £100,000 and you expect to generate £10,000 rental income, your gross yield would be 10 per cent. A net ROI of four to five per cent is generally considered viable.
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Break it up
Take all your overheads in to account and work out your break-even point. Use this figure to gauge how many rental weeks you would need to fill per year and if this is a realistic possibility. You also need to be realistic about how much you can charge per week - for guidance, take a look at our pricing advice.
Mortgage magic
Be sure to shop around when deciding upon a mortgage.
You should always discuss your individual needs with an independent financial advisor but the following types of mortgages are available:
With an interest only mortgage your monthly payment only clears any interest accrued during that time and you pay back the original loan at the end of the mortgage term.
Repayment mortgages let you pay off part of the original loan and some interest each month. The monthly sum will be higher but you will own the property at the end of the mortgage term. Some repayment mortgages let you overpay some months, which could be useful if your rental income fluctuates throughout the year.
Equity release mortgages secure payments against your existing property in order to pay for your new home. This has the benefit of all your payments being in one place and in one currency, but also means that both properties are at risk if you can't keep up with the repayments.
Taxing times
Laws vary from country to country, so be sure to do your own research - use the Internet, browse specialist books or consult the tax office.
Helpful hints
Wise up on income tax in the country where you're investing. You usually have to declare your rental income and pay tax on it.
Double taxation treaties exist between the UK and many popular holiday home spots to stop you paying tax on income in both countries.
Consider registering as a resident in the country where you're buying a home if you spend most of the year there and not in the UK.
Record all income and outgoings. This will make it easier to work out your taxable income to declare at the end of the tax year.
You might like to employ an accountant - search our Property Services Directory to find an expert in your country.
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