In this podcast article we are going to be talking about tips for those who are looking to get into the Holiday Let mortgage market for the first time. We are speaking with Mark Stallard about his vast experience in this field to see what advice he can offer.
How has business been in 2020?
It’s amazing to think that we are already in September 2020 and it’s been quite a year for everyone hasn’t it? The good news is that people still want to talk about property, look at property, buy property and explore all the options that are open to them. Long may that continue!
Historically this has always been the time of year when people have returned from holidays in places like Devon & Cornwall and started to think about buying a holiday home to rent out themselves. This year, for obvious reasons, the word Staycation has become part of our vocabulary, as far more people than normal have decided to holiday in the UK rather than endure the rigours of air travel and potential quarantine on their return from abroad. This in turn has led to an upturn in the number of people looking at buying their own Holiday Let.
So I’ve decided to buy my own holiday let property. What should I do first?
The very first thing I would do, would be to look at what is available from lenders just to get a good idea of what you can and can’t do before you start out. You don’t want to be in a position where you have found your dream property and further down the line discover that you can’t get a loan, particularly if you have made a financial commitment. You really need to know if you are going to be eligible for a loan, if the property you are looking at is going to be acceptable to a lender and whether the loan is affordable before you start out, so first and foremost, do your research.
Do people let their hearts rule their head in this kind of situation?
Yes it does happen. Whether we are searching Rightmove for our dream residential property or looking for our next car we do tend to fall in love first and then look at affordability later. There’s not much point in thinking about what colour you’re going to paint the bedroom walls or where you’re going to park your car if it turns out you can’t afford it in the first place. The process is a bit like doing a jigsaw, so make sure you’ve got all the pieces in the box before you start.
Are Holiday Lets and Buy to Let Mortgages the same thing?
They are quite similar but it’s really important to understand the difference, because it can cause problems down the line when a Solicitor reveals to a lender that the loan is in relation to a Holiday Let when they are working on the assumption that it is a Buy to Let loan. There are still some people in our professional community who don’t understand the difference between the two but if you get it wrong it really can cause problems.
How do the two products differ?
Ultimately the process for each type of loan is very similar and the rate probably will be too, but with a Buy to Let property your lender will work on the basis that the home will be rented out for a 6 or 12 month period and will calculate your monthly rental income based on that. With a Holiday Let you are going to be looking at one or two week rentals over a period of 26 to 30 weeks per year depending on the location and type of property, which is a very different calculation, so you can start to see what the differences are.
Does this mean I will have to prove an income from elsewhere?
Typically, most Holiday Let lenders would want to see a client with income from elsewhere of between £20,000 and £40,000 depending on the lender, but every so often a lender will look long and hard at a case and say that no further income is required. This doesn’t mean that they will be a pushover but certainly, if the facts are right and the underwriting terms are met, then it’s possible to get a loan without additional income.
Do you have an example of a situation where income wouldn’t be required?
As I said, the lender would need a very good reason to lend without additional income but let’s just say Mrs Smith, who has no income herself, wants to buy a Holiday Let in her name only. If Mr Smith has an income of say £50,000 a year and they have a small mortgage on a nice residential property, then that might be a scenario where a lender might proceed without an additional income, as opposed to a situation where they are being asked to lend to a first time buyer who doesn’t have a job.
How do you define a Holiday Let? Does it have to be at the seaside?
That’s a really good question and the answer is that the definition is changing. For example, I can think of a client who has a holiday let in Stoke-on Trent, which isn’t the first place you would consider when you are thinking of booking a holiday, but when you think about it, the town is very close to Alton Towers and Chatsworth House and you can also reach the Peak District or even the Lake District quite easily by car, so there is a story to tell. As long as there is some history of holidays being taken in the area, or a plausible explanation as to why someone might want to rent your property as a holiday home then it might be a suitable proposition for a lender.
Another client I know has four Holiday Lets, in, Huddersfield! Again I can’t ever remember leafing through any summer holiday brochures and finding that particular town, nestled in the pages, however, this particular lady has a business that attracts customers from Australia, New Zealand and South Africa who come to visit their relatives in Yorkshire, so again there is a story to tell.
So what you’re saying is, a Holiday Let can be anywhere?
As long as we fully understand the proposition and can explain to the lender what’s going on there’s a chance it will work, but in reality we’re normally talking about customers who are buying a Holiday Let in Devon, Cornwall, the Lake District, Scotland, Kent and Sussex, those sorts of places, but yes, it could be anywhere as long as there is reasonable proposal to put forward.
Once I’ve got my Holiday-Let can I advertise it on Airbnb?
There are one or two lenders who are still trying to get their heads around Airbnb as they had some bad press when they first started out and their terms and conditions were maybe not to the liking of some, but most are now coming to terms with the idea. As far as borrowers are concerned, I think it’s true to say that most of them would normally use Airbnb as their booking channel so it’s not really an issue.
Again, if you are thinking of buying a Holiday Let and promoting it with Airbnb, talk to us first and we can make sure we’re approaching the right lender.
What kind of Insurance do I need on a holiday let?
It’s probably best to get specialist help with this. If you have a super duper policy with Direct Line that covers your residential home it certainly doesn’t mean that the same type of policy will be suitable for your Holiday Let.
Remember, this is going to be a commercial venture so you need to have a policy that reflects that fact with suitable Public Liability cover included for a start. If you think about it you will have lots of people coming and going at your property and if one of them slips on a step and breaks a leg, for example. you need to be certain that your insurance will cover you.
There are specialist insurance brokers you can use for this, which you may find online but whatever you do, don’t just buy a basic buildings and contents policy and expect that to work for you, because you won’t get paid out if you need to claim and you could be putting yourself at great financial risk from a situation where a Public Liability claim has been made.
What other professional help should I get?
Holiday Lets are generally thought to be more tax efficient than Buy to Let properties so I would certainly want to use an accountant who understood the world of Holiday Lets at a very high level so that’s number one on the list really, an accountant who could help me get the best returns, who understands the project and can help me run it.
You will probably need a surveyor to make sure you were buying a suitable property and obviously, getting a good solicitor who understands the project inside and out is essential.
So before you start, make sure you have an Accountant, a Surveyor and a Solicitor lined up alongside your Mortgage Advisor or Broker.
Can I use the property myself?
That’s a very good question and one that is often overlooked as many people just assume that you can use your own property as and when you want to and just do it, but generally yes, you can.
Most lenders will allow you to spend up to 13 weeks there so that’s probably more time than you need, but remember you might need to spend some time there in addition to when you are on holiday, to do some maintenance work for instance. This isn’t a condition that lenders can check you are complying with very easily of course, but the lender will have rules and will want to try to keep people within those rules.
Are mortgage rates higher on a Holiday Let?
Yes, generally they are. At the moment, here in September 2020, a typical residential three of five year fixed rate mortgage will come in at 1.5%. For a Holiday Let mortgage you would be looking at something like 3.25% to 3.75%. Remember that there are not a huge number of lenders who will consider Holiday Lets and that you are undertaking a commercial venture where the risks to the lender are greater than they would be on a residential mortgage.
Also, there are probably only eight or nine lenders at any one stage who will consider Holiday Let loans reducing to maybe six or seven at certain times and increasing to ten at best, so it’s a limited marketplace of lenders who have a duty to do the job properly. At the end of the day a client has to be prepared to pay for their expertise.
It’s also worth mentioning that these deals can be done on an interest only basis, just like a buy to let. Obviously we need to have a full and detailed discussion with the client to be able to give advice and make a recommendation, but normally you could look at an interest only loan or a repayment plan.
Is there a simple formula that I can use to calculate how much I can borrow to get a ballpark figure?
I’m trying to sweep up 10 lenders into one answer here so it doesn’t quite work because they all calculate things slightly differently. I think what you need to do is to find out from a holiday letting agent at a very early stage what kind of income you could expect from your property in the low, medium and high seasons over 30 weeks, then you can work the figures back the other way.
Say you want to borrow £200,0000. What you need to do to get a general idea is to multiply that figure by 140% then multiply that sum by 5.5%. If the figure you end up with is less than the expected rental then you’re in!
Generally though, please don’t get hung up on that calculation as it won’t always work. It’s better if you talk to us, but if the property is expected to let well then it does tend to work out affordability wise.
With your experience, what type of property “let’s well?”
That’s a very good question, because people think that, if they take a holiday in a property and enjoy it, then everyone else will and it will make a successful holiday let. The proof of the pudding is to maybe look on the letting website or talk to the letting agent and get an idea of how many weeks per year the property is let out for. A good holiday let will be rented out 40 to 45 weeks a year, but don’t think that everyone has the same taste as you!
I personally like a bit of peace and quiet, not too much noise, a nice view and somewhere to park my car but that wouldn’t suit everybody. I might want a nice quiet spot in the middle of Cornwall whereas others will want to be in the centre of Newquay with all that it has to offer in terms of the bars, restaurants and nightlife.
I remember one of the big holiday letting firms in Cornwall telling me that they set
up their business after they had a holiday down there in a property where they couldn’t open the doors of their Range Rover when they parked it in the drive! Their holiday was blighted for the whole fortnight as a result and they realised straight away that they could do the job better than other agents and away they went.
Anything else we should cover?
When we talked about professional help earlier on, I didn’t mention getting yourself a good, expert, letting agent. If you’re living in London or Birmingham you certainly don’t want to be running off down to the West Country to check on your property and change the sheets every fortnight, so you will need to get yourself a good letting agent and factor in the cost of that too. They will be able to advise you about what people do and don’t want in a Holiday Let property as well, so it’s worth taking advantage of that too.
Where can people go to get more information?
People can head to HHHmortgages.com to start with as there is a lot of information on there, but they are also very welcome to give me a call for an initial chat about their options. We don’t charge a fee until a suitable mortgage offer has been provided and we will explain all about that during our initial discussions, so people know if they want to work with us straightaway. We are completely transparent about what we do and what our fees are right from the start.
To give you an idea of what we’re talking about here, it’s worth comparing the situation when somebody is considering a Holiday Let purchase with a normal residential one. When someone is buying a home for themselves we are probably working on that enquiry in detail within a week of the initial contact, but with a Holiday Let we might take a call and it is six months before we go any further as people spend time gathering all the information they need.
I had a conversation with a lady only this morning in which I was telling her all the things she needed to be thinking about with her Holiday Let and her reaction after the conversation was that she thought it all sounded a bit risky. Of course, everyone’s attitude to risk is different, but in my view it’s better for her to be thinking about the risks involved right at the start rather than the day before she is due to exchange contracts.I like to make sure people have all the details they need at the beginning of the process and that’s how we always work.
If you’re reading this and thinking about buying a Holiday Let property then please go on to our website where you’ll find all our contact information and a form to fill in if you have any questions and we’ll be glad to get back to you and help you all the way through the process.
In our business every day is different and questions come up that you haven’t been asked before. It’s a really interesting topic and one that gives everyone involved a lot of pleasure whichever side of things you’re on. We’ve even stayed in some of the properties that we’ve arranged mortgages for and it’s great to see that side of things as well so if you’re thinking of getting into the Holiday Let business please get in touch.