Q We are two women who are in our mid-sixties and will not receive our state pensions for 66 years. I work in schools and earn very little while my partner is a graphic designer who now has very little work.
On the plus side, over the years we have invested in some buy to let properties and are fortunate to have great relationships with our tenants. We also have a furnished rental and are considering purchasing another one. We had an offer accepted on the subject property, but since these were sealed offers, we ended up offering a little more than we should have. So now we’re trying to find a mortgage with a low interest rate before I stop working next year and can’t get any mortgages.
Our mortgage broker offered us one but the rate is quite high. Rental mortgage rates are much lower, but tax incentives for furnished rentals are better. If we took out a rental mortgage, could we then rent the house out on a seasonal basis?
JP
A To answer your last question first, no, you couldn’t. The terms of the rental mortgage usually state that the property is inhabited by the same tenant (s) under a short-term rental insured for the duration of the tenancy. This is the opposite of a vacation property rented to many different tenants (i.e. vacationers) for about two weeks at a time. And in the words of specialist independent brokers holidayletmortgages.co.uk “the use of a rental mortgage for vacation rental, without the express permission of the lender, is a violation of the mortgage conditions, which can have serious consequences, including the forced buyout of the mortgage and damage to your credit rating “.
It is also not recommended to choose to invest in a furnished rental rather than a tax-treated buy-lease. It is true that with a furnished rental, you can still deduct mortgage interest from rental income, which since April 2020 rental owners can no longer do. However, this is only valid if your furnished rental is accessible to the public at least 210 days a year and actually rented at least 105 days a year.
Mortgage interest isn’t the only thing you need to consider when weighing the pros and cons of each type of property. The costs of managing a vacation rental tend to be higher due to tenant turnover, and the chances of getting a mortgage over 60% to 75% of the property’s value are lower than with a rental mortgage loan. You will therefore need to find more money to spend on the purchase of a furnished rental than you would with a rental property. There is also the fact that – as the tax rules recognize – a vacation rental generates income for a limited time while a rental property has the potential to make money for years at a time.
If you are determined to go the furnished vacation rental route and are also determined to find a lower mortgage rate, I suggest you turn to an independent broker who specializes in vacation mortgages.
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