The popularity of holiday rentals in the UK has exploded in recent years. More and more travellers are opting for holiday lets over hotels for the space, amenities, and home-away-from-home feel they provide.
As an investor, this growing demand presents a lucrative opportunity. Holiday rentals can generate impressive rental yields that outpace traditional buy-to-let properties. But coming up with the financing to purchase these types of investment properties can be tricky.
This is where DSCR finance comes in. DSCR (or debt service coverage ratio) loans are specially designed for financing short-term and holiday rental properties. Rather than basing approval on your personal income and credit score, these loans look primarily at the projected rental income of the property.
So how exactly can DSCR finance help you access the best holiday rentals on the UK market? And what are some other financing options to consider? Read on to find out.
What Factors Make a UK Holiday Rental Property a Smart Investment?
Before diving into financing, it helps to understand what makes a holiday rental a strong investment. Here are some key factors to look for:
Where’s the Holiday Hotspot?
- Location, location, location. Properties in prime holiday destinations like Cornwall, the Cotswolds, Snowdonia, the Lake District and Scottish Highlands tend to see the highest demand and rates.
- Coastal towns, villages near tourist attractions and rural cottages appeal to holidaymakers.
- Properties near airports can attract weekend breaks.
Who Are the Target Tenants?
- Families looking for extra space, home comforts and amenities like gardens, barbecues and WiFi.
- Luxury travellers seeking upscale cottages, larger groups booking big holiday homes.
- Speciality stays – romantic breaks, pet friendly, accessible needs.
What Amenities Attract Bookings?
- Must-haves like WiFi, parking, modern kitchens and bathrooms.
- Nice-to-haves like gardens, outdoor areas, hot tubs, pools, games rooms.
- Interior design and styling – holidaymakers expect a comfortable, contemporary feel.
How’s the Occupancy and Yield?
- Look for high occupancy rates (60%+) and strong rental yields (5%+). This indicates demand.
- Holiday lets tend to achieve higher yields than traditional long term rentals.
How Does DSCR Finance Work for Holiday Rentals?
DSCR stands for “debt service coverage ratio”. It’s a metric lenders use to assess repayment ability based on the property’s projected net rental income, rather than the borrower’s personal income and credit score.
Here’s a quick overview of how DSCR loans work:
- The property must have a DSCR of at least 1.25.
- DSCR is calculated by dividing annual net rental income by the annual debt payment (principal + interest).
- For example: A property with £50,000 in net rental income and a £40,000 annual mortgage payment would have a DSCR of 1.25 (£50,000/£40,000 = 1.25).
- This indicates the property generates enough rental income to cover 125% of debt payments.
- DSCR loans generally require at least 25% down and have higher interest rates than traditional loans.
- However, DSCR loans can finance up to 75-80% of a holiday rental property’s value, making it easier to purchase with less cash.
What Are the Benefits of Using DSCR Finance?
DSCR financing offers several advantages for holiday rental investors:
- Lower down payment requirements – Only need 25% down vs. 25-30% for traditional mortgages. This enables you to purchase with less money up front.
- Flexible qualifying criteria – Approval is based on the property’s projected rentals rather than personal income/credit. Easier to qualify.
- Higher loan-to-value ratios – Can borrow up to 75-80% LTV vs. 65-75% with conventional loans. Ability to buy higher value properties.
- Faster closing – DSCR loans can close in as little as 30 days, allowing quick acquisition to seize investment opportunities.
- Interest-only options – Keep payments lower with interest-only payments for the first few years.
What Are the Drawbacks of DSCR Loans?
However, DSCR financing also comes with some downsides to consider:
- Higher interest rates – Interest rates average 1-3% higher than standard mortgages. Adds to overall cost.
- Shorter loan terms – Often max out at 30 years vs. 35 years for conventional loans. Results in higher monthly payments.
- Prepayment penalties – Refinancing or selling early may incur expensive prepayment fees. Reduces exit flexibility.
- Riskier during market dips – Rental income needs to sustain DSCR, otherwise refinancing could be challenging.
- Variable or adjustable rates – Interest rate and payments may start low but then fluctuate, making them unpredictable.
What Are Some Other Financing Options for Holiday Lets?
Beyond DSCR, here are a few other ways to fund purchasing a holiday rental property:
Traditional Buy-to-Let Mortgages
- Offer lower interest rates than DSCR loans.
- Approval is based on personal financials – credit score, income, existing debt.
- Tend to require higher down payment around 25-30%.
- Have tighter lending criteria for holiday lets – prefer long term tenants.
- Avoid financing costs but ties up capital that can’t be invested elsewhere.
- Usually only an option for investors with substantial savings or accessing hard money loans.
- Individual investors or small companies providing short-term loans.
- Offer faster approval but higher rates and origination fees.
- Useful when needing funds quickly for a time-sensitive deal.
Partnership or Crowdfunding
- Pool money with other investors to achieve scale and split profits.
- Platforms like Property Moose, Property Partner and Brickowner allow investment in chunks.
- Tradeoff is loss of full ownership control and sharing of returns.
Which Financing Route is Right For Me? Key Questions to Ask Yourself
Deciding which financing strategy works best comes down to considering a few key factors:
How Much Capital Do I Have To Put Down?
- If you need to purchase with a smaller down payment, DSCR offers more flexibility.
- With large savings, traditional mortgages provide better rates.
What is My Risk Tolerance?
- DSCR carries more risk – can you stomach fluctuating income and rates?
- Traditional fixed rate loans offer predictable stability.
What is My Investment Timeline?
- DSCR works better for shorter flips. Prepayment penalties deter selling before 3-5 years.
- Traditional mortgages allow longer-term holds with lower rates.
How Quickly Do I Need Access to Funding?
- DSCR provides the fastest loan closing timelines.
- Traditional mortgages have lengthier approval and closing processes.
What is My Experience Level?
- First time investors may favor simpler traditional loan route.
- Experienced investors can handle the extra complexity of DSCR.
By weighing these key questions, you can determine if the advantages of DSCR outweigh the downsides based on your unique financial situation, risk appetite, and investment objectives.
DSCR can provide the leverage needed to purchase higher value holiday homes and maximize rental income. But it also comes with more variables to manage. Assess your own capabilities and resources to decide if it aligns with your holiday let investing goals.
Ready to Look at UK Holiday Rental Listings? Key Property Features to Look For
Once you have your financing lined up, it’s time to start scouring the market for promising holiday let investment opportunities.
Here are some of the key property features and listing details to look for:
Location, Location, Location
- Popular and upcoming holiday destinations like the Cotswolds, Cornwall, Snowdonia, Scottish Highlands.
- Rural and coastal regions attract the most traveller demand.
- Proximity to tourist attractions – beaches, national parks, walking trails.
Property Type and Size
- Detached cottages, townhouses, apartments for 2-4 guests.
- Larger country houses, farmhouses, mansions for big groups of 8-16+ guests.
- Variety of properties to cater to different group sizes.
Amenities and Unique Selling Points
- Private hot tubs, saunas, pools.
- Games rooms, firepits, BBQ areas.
- Celeb connections, historic significance, quirky features.
Interiors and Decor
- Contemporary, boutique styling – warm, cosy, and inviting.
- Stocked with all essential appliances and entertainment systems.
- Premium furniture, linens, and decorative accents.
Occupancy Rates and Yields
- Look for 60%+ occupancy and 5%+ rental yields.
- Consistent high seasonal demand is ideal.
- Strong short-term rental track record.
With the right financing strategy and criteria for selecting quality properties, you can build a robust holiday let investment portfolio and maximize your rental returns.
Ready to Start Your Holiday Rental Property Search? Useful Resources and Tips
Now that you understand DSCR finance and what to look for in a strong holiday rental investment, here are some helpful resources and tips to kickstart your property search:
Holiday Letting Listing Sites
- Airbnb – One of the largest listing sites for holiday rentals globally. Can view listings, locations, rates, reviews and availability.
- Booking.com – Popular alternative to Airbnb with professional listings of verified holiday homes.
- HolidayLettings – Leading UK holiday rental site with advanced search filters and map views.
- Tripadvisor Rentals – Vacation rental arm of Tripadvisor travel site. Displays reviews and popularity ratings.
- Rightmove – UK’s largest property portal. Filter for holiday lets and view listing details.
- Zoopla – Another top UK property site. Look in the commercial section for holiday rentals.
- OnTheMarket – Rival portal that provides value data like rental yield.
- Allsop – Leading commercial and residential property auctioneer. Search upcoming lots online.
- McHugh & Co – Specialist holiday let auctioneer. Properties typically sold fully furnished and let.
- SDL Auctions Graham Penny – Character and coastal holiday properties often featured.
Work With a Buyer’s Agent
- HolidayLettingsPro – Network of buyer’s agents specialized in holiday properties.
- FindUKProperty – Will source and bid on suitable rentals on your behalf for a fixed fee.
- BrickBuyBrick – Provides research, viewings, negotiations to streamline buying.
Join Investor Associations
- National Landlords Association (NLA) – Largest UK landlord association. Offers info, training, discounts.
- Association of Residential Letting Agents (ARLA) – Trade organisation with resources for holiday letting.
- UK Association of Serviced Accommodation (UKASA) – Industry body promoting and supporting holiday lets.
By leveraging these resources and services, you can more easily identify promising holiday rental investments that match your search criteria and secure properties with lucrative rental potential.
DSCR finance can be an effective way to fund purchases of high quality holiday letting properties, especially if you need to buy with less cash down.
It provides flexible qualifying, higher leverage and fast access to funds. But also analyze your risk tolerance and timeline before opting for this higher cost financing.
Traditional mortgages, cash purchases or crowdfunding remain solid alternatives too. Each route has pros and cons to weigh against your investment objectives and situation.
No matter how you finance the purchase, focus on finding holiday rentals in top locations with features and amenities that attract bookings. Occupancy, yields and past performance have to demonstrate income potential.
Utilize online listings, property portals and buyer’s agents to discover the most promising options. DSCR finance can supply the fuel, but locating the right underlying assets is key to funding future returns.