A clear, straightforward guide from Drake Mortgages
Choosing between a Buy to Let (BTL) mortgage and a Holiday Let mortgage can feel complicated, especially following recent tax changes.
Below is a simple, updated comparison to help you understand how each option works-and which route might suit your investment plans.
Buy to Let Mortgages
A Buy to Let mortgage is designed for properties rented out as your tenants’ main residence, usually under an Assured Shorthold Tenancy (AST).
How lenders assess a BTL mortgage
- Lenders review both your personal profile and the investment property’s potential
- Borrowing is determined by a rental-stress calculation, meaning the forecasted or actual rent must comfortably cover the mortgage at an interest rate, which is usually higher than the rate that you will pay
- Property location is not typically a major factor if the valuer supports the rent and purchase price.
Mortgage features
- Repayment or interest-only options
- Fixed, tracker, or variable rates
- Buildings insurance required, and contents cover if furnishings are supplied
Restrictions
- You cannot live in the property without lender approval.
- Running costs and certain expenses can be deducted for tax purposes, but full mortgage-interest deduction is no longer available due to Section 24.
Our Buy to Let Mortgage Guide covers this topic in more detail.
Holiday Let Mortgages
Holiday Let mortgages are designed for properties let to paying guests on a short-stay basis– holidaymakers, tourists, and weekend visitors.
How lenders assess a holiday let mortgage
Holiday letting has become an established mortgage category, with more lenders entering the space each year. These lenders usually expect:
- A good credit history
- A provable annual income (most commonly £20,000+)
- A property with strong holiday-letting potential
Seasonal rental projections-often provided by local holiday-letting agents- help lenders understand the property’s earning potential across low, mid, and high seasons. Most lenders use an average of the low, medium and high season weekly rates, allowing 30 weeks into the calculation, before applying their stress test.
A couple of lenders work off the gross total.
Many holiday let applications are manually underwritten, giving lenders flexibility when the overall proposition is strong.
Mortgage features
- Available on repayment or interest-only
- Fixed or variable rates
- Requires specialist holiday-let insurance and full furnishing
Usage restrictions
The lender will specify that the property must be used as a holiday let. Switching it to a Buy to Let or personal residence requires consent.
Learn more: What is a Holiday Let Mortgage?
Tax Update: Holiday Lets Now Follow Buy to Let Tax Rules
The UK government has abolished the Furnished Holiday Lettings (FHL) tax regime from April 2025.
This removes the previous tax advantages and brings holiday lets fully in line with standard residential investment property taxation.
This means that from April 2025:
- Mortgage-interest relief becomes a basic-rate (20%) tax credit, just like Buy to Let.
- Capital allowances on furniture, fittings, and equipment will no longer apply; only replacement-of-domestic-items relief is available.
- Capital Gains Tax benefits, such as Business Asset Disposal Relief and rollover relief, will end.
- Holiday-let profits will no longer count as relevant earnings for pension contributions.
In short, the preferential tax treatment for holiday lets has been removed, and their taxation is now aligned with other rental property businesses. We strongly recommend seeking professional tax advice if you own or plan to buy a holiday let.
Using an SPV Company for Holiday Let Investments
With the tax changes reducing personal-ownership benefits, many investors are now choosing to purchase holiday-let properties through a Special Purpose Vehicle (SPV) limited company.
This can offer certain tax-planning benefits, particularly for higher-rate taxpayers, because limited companies are taxed differently from individuals.
However, an SPV should not be viewed as a magic bullet. Alongside the potential advantages, there are additional considerations:
- Lenders typically charge slightly higher interest rates for limited-company borrowing.
- You will incur ongoing accountancy and compliance costs to run the company.
- The structure adds complexity, which may or may not be worthwhile depending on your personal circumstances.
For some investors, an SPV provides clear long-term benefits; for others, the extra costs outweigh the tax advantages. A specialist tax adviser can help you decide whether this approach is right for you.
Related reading: Using an SPV Ltd Company for Your Holiday Let