Holiday Home Finance
Here is our guide to mortgaging your holiday home investment, how to handle tax from your rental income and how to budget as a property owner.
What type of Mortgage do I need?
When it comes to our finances, most of us stick with what’s familiar rather than shopping around for the best deal. Compare rates, products and fees on mortgages with a range of banks and building societies and remember to check online for information and quotes.
Interest only mortgages mean that each payment you make only clears the accrued interest each month. At the end of the mortgage term you then have to repay the original amount of the loan itself, usually from the sale of the property. This kind of mortgage can work out well if you want to buy and sell in the short term in an area where property prices are rising quickly.
Repayment mortgages are more common. With these loans each month you pay off interest and a part of the original loan amount. Your monthly payments will be higher, but you’ll own the property once payments are finished. Many repayment mortgages allow you to overpay for some months to shorten the term of the loan, which is ideal if your rental income will fluctuate with the seasons.
Equity mortgages secure payments against your first home to pay for the second. This keeps all your payments in one place and in the same currency, but both properties would be at risk if you couldn’t keep up with payments.
Buy-to-let mortgages are not necessarily applicable to holiday homes or short term rental properties. We strongly recommend that you consult an independent financial advisor to discuss your individual needs.
Many banks have links with companies abroad, and you can set up payments in another currency but be aware that exchange rates will affect your payments.
How do I deal with tax?
It’s hard to find tax advice in plain English, and the laws vary from country to country. Do your own research into tax laws, consult one of many books about buying abroad and if in doubt get in touch with the tax office or hire an accountant.
- Investigate the laws on income tax in the country where you’re buying. Usually you will have to declare the income from your holiday home every year and pay tax on it.
- In most countries where Britons buy second homes, a treaty is in place to stop you paying tax in both countries, so look into this for where you are planning to buy.
- If you spend most of the year living outside the UK, being registered as a resident in another country could save you money.
- Keep a spreadsheet for your bookings and the payments you receive. Also record all your mortgage interest payments. This will keep you organised and it will make things easier when you have to declare your net income at the end of the tax year.
- Keep your receipts. Keep all receipts related to costs for your holiday homes. Add up your expenses and deduct it from your overall income. What’s left is the amount you’ll pay tax on.
For more details on how to manage your taxes, check out http://www.direct.gov.uk and follow the link for tax.
If all this is all too much, you can employ an accountant to help! Try searching our Property Services directory to find an expert
How do I budget?
The golden rule when you’re buying is to always have in mind a price ceiling and stick to it. You need to include in this price account charges, taxes and costs of renovating.
Some things you may need to factor in when deciding how much you have to spend include:
- Mortgage arrangement fee
- Legal costs
- Survey or Valuation charges
- Stamp Duty or Local Taxes
These costs tend to be lower in up and coming countries, but you need to do research into the specific charges for where you are buying.
Next think about the costs of running your holiday home.
- Mortgage payments
- Building and liability insurance
- Management charges*
- Letting Agency Fees*
- Marketing*
- Changeover costs
- Maintenance, repairs and renewals
- Urbanisation fees if you have shared facilities
* These costs will depend on how you choose to rent out your property
Calculate your property’s yield. The yield of a property is what percentage of the property price you make every year through rentals. Calculating your property’s yield is important – you want to make above a certain percentage to make your rental viable. You need to get an estimate of how much rental income you could make and then work out the net yield – the value of your property and the income minus all your overheads and including tax. Around 4-5% is generally considered viable.
Consider currency conversion rates in the longer term – these will have a greater impact on how much profit you can make on your property than most other factors. You also need to know the economic outlook for your particular country as it will affect property prices.
Add these costs up. Work out how much you’ll be paying out and how much will be coming in every month. Work out the point at which you’ll break even – the moment when the rental return from your property covers all the costs associated with it. How many weeks a year do you need to fill to break even and is that realistic?
Top Tip
Higher price, higher rent?
If you’re looking at several properties and one stands out because of its great sea views or huge balcony, it will probably cost you more. But those features may attract more holidaymakers and they’ll also let you charge more in rent. Don’t always go for the lowest price, think about what will bring in customers over the longer term.
