In our last newsletter, we highlighted the probability that investors hurt by the government’s punitive measures would start looking for new, less emotive places to invest their capital that would still deliver a decent yield of 8% or thereabouts. Well, that’s precisely what has happened. Already, the interest in buy-to-let mortgages has dropped off by a whopping 50%. And 50% is just the start. As the amount of mortgage interest that can be offset falls by 25% per year until 2020 when it reaches zero, to be replaced by a meagre 20% tax credit, more and more landlords will find themselves in an untenable business position.
Because of this, investors hamstrung by both government policy and tighter lending criteria are now sniffing around the UK’s most bucolic idylls in search of furnished holiday homes instead. Interestingly, The very same tax benefits that once applied to buy-to-let, and now don’t, such as the full relief on mortgage interest as a business cost, can be happily rediscovered in a holiday home investment. Holiday homes are also, rather bizarrely, exempt from council tax and local business rates. And there are other tax benefits, too, relating to pensions, and capital gains tax (CGT).
On CGT, as discussed in our previous newsletters, residential buy-to-let landlords were made exempt from the CGT reductions—28% to 18% for higher rate taxpayers and from 20% to 10% for those on the lower rate. It was another punch in landlord’s’ guts. But this is something those investing in holiday homes won’t have to stomach, due to begin able to claim what is known as ‘entrepreneurs relief’.
Take the holiday home hype with a pinch of salt
If this is starting to sound like an advertisement for purchasing holiday homes, it’s not all good news. Considered as second homes, the investments still attract the additional 3% stamp duty that has hurt residential buy-to-let so much. And the size of the market is limited. Also, in certain parts of the country where the fabric of communities has become moth-eaten by holiday homes lying dormant out of season, local councils, such as St. Ives in Cornwall, have stepped in to prohibit the buying of new builds for use as second homes. Other regions are watching closely and are considering holding local referendums in the hope of implementing similar measures.
All part of the reason that, while holiday home buy-to-lets might at first glance look great, and certainly stack up far more than traditional buy-to-let, the reality is that they are, both at a local and political level, still fraught with emotive tension. ‘Limited stock, resilient prices’ is the sort of sales strapline engineered to hook investors into buying holiday homes in the first place, but it is also the sort of strapline that should alert investors to the resistance they could face when this much smaller niche market starts to overheat.
Consider the costs in relation to the yield
In addition, while gross yields are said to sit at an attractive 12%, seasonality needs to be factored in, as do the high costs of maintenance and servicing those properties to keep them to a lettable standard. Once costs and vacancy periods are taken into account, yields typically halve. In addition, holiday home buy-to-let mortgages are around 1% higher than residential buy-to-let, and this extra front-end cost will impact the yield. Increasingly, banks also need to conduct stress tests to ensure that borrowers can cover repayments in the event of interest rates reaching as much as 5.5%, making mortgages harder to access in the first place.
But with buy-to-let easing off and real upside limitations to holiday home investment, combined with a fragile and uncertain market what other options could there be?