Monday 19 February 2018

A holiday home of your own

The banks may lend for holiday homes, but don't count on the potential rental income

Illustration: Tom Halliday
Illustration: Tom Halliday

John Cradden

There's no stronger temptation to buy a holiday house than when you're sitting in the one that you've been renting for the past two very pleasant weeks, during which you have taken full advantage of a blast of good sunshine.

Now you're down to the last of the summer wine and you've to reluctantly head home the next morning, but you might just detour to the local estate agents on the way to see how prices are doing?

Catherine O'Reilly, of the Wicklow branch of estate agents Sherry Fitzgerald, says that while prices have risen quite strongly in the last couple of years, there is still very good value to be had. Houses in developments in the popular Brittas Bay area that would have sold for close to €450,000-€500,000 at their peak are on the market now for about €200,000-€220,000.

Prices had fallen more steeply than other types of property during the crash, but they remain a discretionary purchase more often bought with cash than with mortgages, she said. "There was an over-compensation in that sector of the market that is still correcting now, but there's still good value."

Ideal time to buy?

But if prices are recovering from what was clearly a low base, does that make it an ideal time to buy?

"At this stage, yes, you could make a case that it's financially viable," said Ms O'Reilly. "If you look at the values that were being achieved at different times, you could never have made it work - it was a lifestyle choice. It makes financial sense now in a way it wouldn't have done in the past."

There is still the Local Property Tax to pay, but management fees for many holiday-home developments have fallen across the board, she said.

The annual management charges for such developments would be between €2,000 to €2,500 a year. "What a lot of our clients would do is they would rent their house for maybe three or four weeks during the summer and use that money to pay the management fees."

People buying a single holiday home purely to let out is rare, she said, with holiday lets remaining the preserve of professional landlords. "There's a lot of money to be made in holiday-home lets, but there's a lot of work in it as well."

Those who end up letting out their property for long periods may have done so just to make ends meet. "What we saw maybe two or three years ago with people who bought holiday homes was, rather than rely on the extra work and the extra uncertainty of holiday lets, they actually rented them out for six or 12 months of the year for the comfort of knowing that somebody is paying something per month against the property, but we're very much seeing a return to enjoying them for their own use, in the summer."

If they have young children and can't go away until June, they use June rental income to "take some sort of pain out of the very high level of costs, and then they feel like they're using it for free for the summer".

Buy close to home

She also strongly recommends buying somewhere that's not too far away from home. Some Dublin-based buyers might gravitate to a property as far away as west Cork or Galway, "but the joy of a holiday home is that you get to use it".

"If you have a holiday home in Baltimore, west Cork, it'll be gorgeous when you get there, but you'll be less inclined to pick up the phone to your partner at 4pm on a Friday afternoon and say, 'Let's go, the forecast is going to be good'. That's the joy of the north-Wicklow area [for Dublin-based buyers]," said Ms O'Reilly.

September is the busiest time for holiday home sales, she adds, after sellers have used the home themselves over the summer.

But if you're not a cash buyer and you need to rent out your property for longer periods, just to keep on top of any mortgage repayments and other running costs, this is where the economics might start to get tricky.

"Banks are reluctant to lend for holiday homes, seeing them as a negative rather than a positive investment," said Karen Mulvaney of "So you will often find holiday-home buyers are cash.

"If they are being purchased to rent in between visits, it is hard to convince a lending institution that it is a good thing as they are usually in rural locations, which makes them more difficult to rent and for a much lower income than cities.

"Renting in between your own visits would also usually mean you are trying to rent off-peak season, so the rental rates would be even lower again."

Popular spots only

Certainly banks may look more favourably on homes in popular spots, such as Connemara, Donegal, Wicklow, west Cork, Kerry and Wexford.

"There are certain locations that will always be in demand, but prices are still slow to increase as the demand is not as high as it previously was," said Ms Mulvaney. "I think because of the extra taxes incurred on holiday-home owners, they are less of an investment and more of a lifestyle."

The old 'second home' tax of €200 a year that was introduced in 2009 followed by the infamous €100 household charge were both replaced by the Local Property Tax in 2013, which is based on the market value of the property. The LPT payable on a home worth between €150,000 and €200,000 would work out at around about the same as the two old taxes put together.

Mortgages classed as buy-to-let

Gerry Hiney, of Dublin-based mortgage broker and advisor Park Financial Planning, says that banks may in the past have had mortgage products specifically for holiday homes, but nowadays would class mortgages for holiday homes as a buy-to-let. "If you buy a holiday home, it is treated for underwriting purposes on the banks' books as a buy-to-let."

The conditions would be the same as a buy-to-let mortgage, he said, but you wouldn't be required to let it out as long as you have the income to cover the loan.

"Most holiday homes wouldn't be in what would be considered prime letting areas, so the person's income would need to be sufficient to cover their existing home mortgage and the holiday home mortgage because they simply wouldn't get enough rental income," said Mr Hiney. "It's based purely on your ability to repay the mortgage."

But because it's usually not an investment, most people would be putting in a lot of their own money anyway, he adds. The location will be a factor, but lenders can lend up to 70pc LTV. "The average would be 50-60pc, but if it's in the right area, that could go up to 70pc."

The right area, he said, might be somewhere just outside a major city such as Dublin, Galway, Limerick or Cork, and lenders might factor in the potential rental income, but for more rural locations it would all depend on the strength of the applicant's income.

Naturally, the mortgage rates will be more expensive the higher the LTV. A 60pc LTV might qualify for a 4.5pc variable rate, but would rise to 5.5pc or 6pc for up to 70pc LTV.

Liam Ferguson of Ferga and Associates said: "If the holiday home is being used as the security then the LTV will usually be 65pc to 75pc. But it's also possible to use the family home as security for a loan to buy a holiday home."

Don't forget to factor in other running costs, including the LPT, maintenance and cleaning, home and contents insurance and advertising for peak season holiday letting, should you choose.

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