It is important to understand the differences between these two property types.
Just because they both involve letting does not mean that they are similar; in fact the word “let” is possibly the only similarity.
The law, taxation and finance for these including much of the underwriting rationale for the finance are quite different.
Let us look at the fundamentals for each
Buy to Let (BTL)
This term arises from the buy to let mortgages used to purchase such properties; it is not a term in itself. It applies to the long term letting to residential tenants of a residential property using an Assured Shorthold Tenancy Agreement. It is for residential applicants only, not for businesses who subsequently sub-let to residential tenants or for House in Multiple Occupation (HMO).
In the case of businesses, a formal commercial mortgage should be used. In the case of an HMO, this a hybrid of residential and business. It uses a specific type of BTL mortgage which has its own underwriting requirements but otherwise the laws that govern the landlord and tenant are as with BTL as are the rules on taxation.
The term used by HMRC is Furnished Holiday Let (FHL) and you will see it used frequently. FHL is a business and the property, which is usually a residential property, is let on short term lets of less than 4 weeks each for holiday use. The law refers to commercial agreements and taxation is different to BTL.
Can I use a buy to let mortgage for a Furnished Holiday Let or vice versa?
This is a very common question.
The answer is NO.
It would be a direct infringement of the mortgage conditions and the lender is within their rights to demand immediate repayment of their loan. FHL and BTL use different criteria and thus they are not interchangeable.
How would a lender find out? We can list 3 circumstances that we alone have seen and have tried to rescue clients
- Neighbours have contacted the mortgage lender. A BTL mortgage was being used for FHL
- Solicitors, who, remember, act for you and the lender at the same time, and have seen suggestions in the application that contradict themselves
- Loss adjusters acting in an insurance claim have, after checking Her Majesty’s Land Registry (HMLR), reported that a lender was being used who does not allow that usage. A BTL mortgage was being used for FHL. In this case the consequences were dire! Not only was the insurance claim rejected, it was stated that he application for insurance had been purposely misrepresented, which was fraud. This misrepresentation would have to be reported on any insurance application even for car insurance. We can only extrapolate other potential and similarly dire consequences, for example that such fraud appeared on your credit history under the CIFAS section (Credit Industry Fraud Avoidance System)
Buy to let insurance primarily insures the building and includes Property Owners Liability for harm to tenants. It does not routinely include contents insurance, unless specifically requested. Nor does it include any rent protection of legal protection unless specifically requested. Be prepared for the insure to credit score the tenant if rent or legal protection is requested.
We have already warned above about the consequences of having the wrong insurance for the wrong mortgage. But there is another problem that leads us to think that most landlords who think they are covered are not actually covered. Part of the blame is with letting agents and part with the landlords.
Within the terms of the insurance there will be a section which refers to how often visits must be done to a property whilst occupied and also whilst unoccupied and to make a record of the visits. If you do not do the visits as specified, then the insurer is at liberty to reject your claim. If you have changed insurer and not informed the agent, then that visit frequency may have changed. Similarly, it is the landlord’s responsibility to make sure the agent does the visits as per the required frequency.
Another point which is worth checking in the policy wording is how the cover may change if the property has been empty for a while. Normally after a period of time of un-occupancy, usually 45 days or 60 days, insurers will reduce the cover to what is known as “Basic Perils”, unfortunately with the acronym of FLEA cover – Fire Lightening Earthquake and Aircraft, although the liability component stays in force.
Issue for FHL as opposed to BTL
We will not go into the issues on taxation of FHL. A Furnished Holiday Let (FHL) is still treated by HMRC as a business. Tax treatment is very different to BTL and we will not go into all the areas pertinent to FHL. We strongly recommend that you seek the advice of a qualified accountant.
The holiday let insurance is specially designed for FHL. One important factor that is taken account is that it may be occupied one week and empty the next. You may ask why that is important. Well on the basis that the property is well furnished it is attractive to burglars. From a burglars point of view if he sees the lights are off on a Monday he can guess that he has all week to ransack it.
In respect of furnishing, a holiday let needs to provide facilities and furnishings that attract holidaymakers. It is as simple as that. It is for the landlord to decide what those facilities should be. This ranges from an overnight hostel for walkers in the Brecon Beacons to luxury apartments on the North Devon Coast.
When considering a holiday let investment it is not just the furnishings and facilities that you need to consider. There are other routine costs such as laundry, cleaning and gardening, together with “meet and greet” and inventory. Whereas the overall gross income for holiday letting is almost always greater than for buy to let, so are the costs.
We have tried to cover the most salient issues for these two types of investment but please call us if you have any other questions.
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Mark has worked in financial services since 1995, initially as a Financial Adviser and then a Compliance Officer.
He has been a Senior Holiday Let Mortgage specialist at Drake Mortgages since 2001. He is often quoted on lenders websites and can be found in the press, talking about holiday let and available finance.