What’s the difference between a holiday let mortgage and a buy to let mortgage?
A holiday let mortgage is essentially very similar to a buy to let mortgage. What’s the difference? A buy to let is a commercial type of mortgage done for a short term tenancy, typically six months or 12 months.
A holiday let mortgage uses similar, if not the same products as the buy to let, but people who are commercially borrowing the property for a week, three weeks, a month down in Cornwall, in the Lake District, in the Scottish Highlands.
How would that difference affect things like rates and the whole process?
It’s all connected to the affordability calculation. On a residential mortgage, you determine the affordability by looking at a person’s income, their outgoings and their credit commitments. It’s quite a straightforward calculation. When you’re looking at expected rental returns, that differs greatly.
So with a buy to let, obviously you’ve got a tenant in there for six or 12 months. It’s quite stable. With a holiday let, you’ve got peak periods of the year. You’ve got quieter periods of the year. It’s to do with how that rental value is assessed.
All lenders are interested in building in buffers so if you have periods where the property isn’t rented out you can still maintain your mortgage payment. It protects you.
With a holiday let mortgage, they’ll look at the average weekly rental rather than monthly or annual rental, the weekly rental in low, medium and high seasons, and then average that out and come out with a figure. Then that really determines what you can borrow.
How has 2020 impacted the market. Do lenders look at past rental information?
Typically lenders will look at figures put together by the accountant over the last year. Obviously someone who is just about to purchase may not have these figures or access to them. It would therefore be prudent to use projections from bonafide holiday letting agent.. We would suggest a customer go to a reputable holiday letting agency, and ask them to produce a letter indicating what they felt the property would be expected to make over three seasons.
Where does AirBnB fit into a holiday let mortgage?
Airbnb is only a little word, but it’s a very big word in our world. I think that a lot of people use Airbnb as a booking tool for their property. Not to be confused with people who have a lovely home in the Cotswolds or in Devon or in Cornwall and let a room out on an Airbnb basis. It’s absolutely right that the Airbnb records can be used to show the returns of a property.
What else is a lender looking for in terms of income?
So credit’s an important one. Mostly they want clean credit profiles. You can talk to some lenders about minor blips and things like that if there’s a good explanation or a good reason behind it.
First and foremost it’s driven by the property and the anticipated rental incomes. There are some criteria that change from lender to lender. We piece this together to find the right lender for that customer.
It may also depend on the country in which you want to buy. Scottish highlands as an example may limit the number of lenders.
The majority will want the client to be earning an income outside of property or have a separate income already. Some will vary their deposit levels. Typically, you might have to put 25% down.
There’s a myriad of different criteria and solutions that need to come together, and ultimately that is what we do. We ask the right questions to pick up on this detail really early doors so that we can find the right lender in this space.
Can an expat get a holiday let mortgage?
It is not unheard of to secure a mortgage for someone outside of the UK, we have in fact done this recently, but in short, the more variables that are thrown into the mix criteria wise, it’s becomes much harder to find a holiday let lender, there are a handful that would specialise in expat mortgages.
Am I too old for a holiday let mortgage?
The higher end would go up to about 85 , not all lenders will go to 85, but with the right circumstances and everything lining up. If you’re a 60 year old looking to take out a holiday let mortgage, there’s a good 25 year term available there to make sure that the repayments, if you want to do repayments, are manageable.
Typically our clients would be an older couple. By older we mean above the age of 40. They’ve possibly been down to Cornwall more than a couple of times and maybe they’re starting to think about somewhere they would like to retire to. Maybe in their journey, the first step is to buy a holiday let and see how it goes.
Can I stay in my holiday let property?
So a holiday home will typically be assessed as a form of second property. The plan will not be to rent it out on a commercial basis like it would be with a holiday let.
So from an affordability point of view a lender will look at this as if they would assess you buying your own predominant residential property.
They will look at your income. They will look at your credit commitments and they will also factor in your existing mortgage as well to see if you can afford the repayments on that holiday home.
Whereas the holiday let is that more professional investor side of the market where they can still use the property themselves a few weeks for the year, but that property’s primary purpose is going to be as an investment, driving a return rather than being that second home where they might spend half their time in it.
Is there a hybrid model?
That’s a gray area really. Nothing is written stone on this. The question is, do you want a holiday let or do you want a holiday home? Obviously when we do our fact finding process with a customer, we’re very keen to really get that bit explored and nailed off effectively.
Lenders probably have their own expectations around how often you should be, could be using that property yourself. But I think brokers like ourselves will be very much taking you into the journey and understanding your intentions for that property and then putting you on the right type of mortgage and doing everything absolutely correctly.
How early on in this process should I speak to a mortgage broker?
People approach us at really different points in the journey. Sometimes we get a volume of calls towards the end of the summer when people might have been down in Devon or Cornwall and have got interested in the idea and want to find out a little bit more about how it works.
Then we can explain that to them and showcase some of the numbers involved and how the process works. They might go off for 12 months or so until they find that right property and the dream becomes more of a reality.
Then we have people come to us right at the other end of the spectrum whereby, they’ve tried to do it as a buy to let either themselves and not managed to complete on it, or they haven’t asked them the right questions and we get a 12th hour phone call saying, “I need to complete on this property. I’ve done the wrong type of mortgage. Please help.”
It’s kind of anywhere in between. We’re more than happy to spend time with people up front, helping them understand how it all works and then stay in touch with them until they do find that right property. We only charge our fees once we get a suitable mortgage offer for a client. That initial part of the journey, as it were, however long it takes, there’s no cost for people to get in touch and find out a little bit more.
In an ideal world we’d like customers to call us as soon as they start to think about it, because this is a unusual, potentially complex area of lending, and the sooner we can deal with the details the better.
What If I Want To Eventually Live in My Holiday Let Property?
We would encourage people to go away and look at potential income returns, if they’re buying the right type of property in the right location.
We touched on the affordability assessments and what we tend to find with holiday lets is if they’re good holiday lets and the right type of property, their rental calculations stack up time and time again. And so, it is a really good opportunity for people to explore.
A lot of people will say, “We’re going to go and buy one and then we’re going to live in it and retire there.” I don’t think too many people would want to stay in the same property as they’ve let out successfully. I think they’re two different things.
If I wanted to go to Cornwall to retire. I wouldn’t personally want to be right next to the sea with a property that’s making a lot of money because it’s in a very, very busy village or a very busy town.
They are different. My advice would be go there, talk to a holiday letting agent, find out an area that really works, speak to people in the area, look at and buy a house that works for commercial reasons, not somewhere that’s very pretty and has roses around the door that they want to live in themselves.
Of course they’ll want to stay there for two or three weeks a year, and maybe they want to go down in October and spend time doing some maintenance on the place. But I don’t think it’s the same as their future home in all cases.
You just want somewhere that’s going to rent as many weeks as possible. In normal times, we tend to talk about 30 weeks. Most of our portfolio are getting 40 – 44 weeks letting out on their property. So it’s really good, really strong.
That’s what you want. You don’t want to be staying too often during busy times as that’s an income opportunity lost. It’s about making some money and maybe you can invest that money in a nice place yourself further down the line.
It’s the little touches that go far – If you advertise a property as pet friendly… have a dog bowl waiting so the dog can have a drink on arrival as well. Think about yourself in that scenario. It’s the little things that actually do add up and do really matter and can make it a really successful property for you.
Are HHH specialists in Holiday Let Mortgages?
Well, that’s what we do. If someone rings us this afternoon and they’ve got some really bad credit and they want to talk about a bad credit mortgage, of course we’ll help them, but it’s not an area of expertise.
Whereas if there’s anything with holiday let in it, anything with the H word, we swallow it up. We read about it, learn about it, talk to lenders, lenders know we’re experts. One or two of those lenders came to us for the last couple of years and asked us to help write their criteria. So we know what we’re doing and we know the bear traps to avoid.