Holiday Let Mortgages

Whether the purpose of this purchase is for sheer enjoyment or an investment, the good news is that you can realise your dream with a holiday let mortgage. Not only this but there are tax benefits and you can boost your income as well.

Holiday Let Mortgages

If you have ever dreamed about owning another home, perhaps a coastal property or a heritage house in a historic town, then you may need to explore your options regarding a second mortgage.

Whether the purpose of this purchase is for sheer enjoyment or an investment, the good news is that you can realise your dream with a holiday let mortgage. Not only this but there are tax benefits and you can boost your income as well.

What is a holiday let mortgage?

This is a mortgage that has been specifically designed for individuals that want to borrow the money to purchase a property that has the purpose of being let out to people on a short-term basis, like tourists or holidaymakers.

This is not the same as a holiday home mortgage. A holiday home mortgage is designed for people that are looking to buy a second property for their use only, and not for the purpose of making a profit through the rental market.

It also differs from a buy-to-let mortgage. A buy-to-let mortgage is designed for people who intend to buy a property for the purpose of renting it out, however, this is on a long-term basis

Understanding the difference between holiday let mortgages and buy-to-let mortgages

There is no denying that buy-to-let properties have been popular for many years now as an investment. However, a lot of people are now viewing holiday lets as an alternative, attractive investment.

Holiday lets are attractive as they can often be rented out for much more money when compared with traditional rental properties. This allows owners to generate a much bigger income if you are able to let it out on a regular basis.

HMRC also views furnished holiday lets differently to buy to lets. You are able to claim tax relief on mortgage interest because holiday lets are classed as a business. With buy-to-let properties, this relief is being reduced.

In order for a property to be deemed a holiday let, instead of a buy-to-let, it needs to be available for people to let as furnished accommodation for a minimum of 210 days within a calendar year.

Securing a holiday let with the right mortgage

In order to purchase a holiday property, a specialist mortgage is going to be required. Traditional residential mortgages are not suitable for such a venture, as they do not let you rent out your property. Moreover, a typical buy-to-let mortgage is probably not suitable. You’ll need a mortgage that has been designed with a holiday let in mind.

The issue with a buy-to-let mortgage is that the lender is going to look at the yearly rental figure based on the assumption that the property is going to be let for between six and 12 months on an assured shorthold tenancy. This is how a lender might work out your affordability. This does not work well when you’re intending to purchase the property as a holiday let, as you’re probably going to be renting out the property on a daily basis, rather than a monthly one.

If you go for a specialist holiday let mortgage, a lender is likely to loan you an amount that is based on an income projection figure, as opposed to a simple multiple of your possible rental income. The lender needs to know that you are going to be able to cover the mortgage when the property is unoccupied, and so your earnings will also be taken into account as well.

There are a number of other factors that will impact your eligibility, which is something our experienced team will help you with. The type of property you purchase will also impact your ability to secure a holiday let mortgage. This is important because the lender wants to be sure that you could easily sell the property if required. It is much harder to get a mortgage on a property that is limited to purely being a vacation home, such as a holiday park home.

How much can I borrow?

Unlike a standard residential mortgage, but similar to a buy to let, you are going to need a minimum of a 25% deposit in order to apply for this sort of mortgage. The reason a bigger deposit is required is because there is a higher risk to lenders when compared with standard mortgages for buying a residential property.

Once you have accumulated 25% deposit required, the lender is then going to take a look at whether the property is going to be able to generate a rental income. The rental income needs to cover the mortgage plus a buffer that is designed to cover any potential void periods. All lenders have their own calculations, but they’ll often be stressed at a higher interest rate too, to enhance the security for the lender and client alike.

For example, let’s say you were to buy a holiday property that was valued at £300,000, you would need to accumulate a minimum of £75,000 for the deposit. The lender would then want to make sure that you were able to generate a minimum of £18,000 per annum, and between £600 – £750 per week as an average over. These are rough numbers and are to be used for illustration purposes only. We’re happy to run through any specific scenarios with you.

Criteria For Securing A Holiday Let Mortgage

Lenders will want to make several checks on the holiday let property that you want to buy, as well as on your personal circumstances. Each lender has their own criteria, but the following are generally relevant for a large number of lenders:

Typically, a lender will want its borrowers to be earning upwards of £20,000 per annum. There is currently one lender which asks for no minimum income, but they will want to see a good overall financial position. When we talk of income, we generally refer to separate income to that the proposed purchase is going to generate

Generally, a borrower needs to be 21 years old and the loan can run typically until age 85 years of age. The extremes of that would be age 18 and a maximum of 95 years old but these parameters are rare.

It is rare to find a lender going below £50,000 in loan amount and maximum loans vary from £500,000 to £1m typically with £2m being available on some occasions. 

This will always depend on the current market conditions, but the rates are usually available at 60% loan to value, (LTV). The normal maximum for most lenders is 75% LTV and if they are in the marketplace however there is one lender who may lend up to 80% LTV. 

The lender will normally want to know what income the property can generate on a weekly basis during low, medium, and high rental periods. Typically, a lender will want to see a 30-week period and these figures can be obtained from a holiday letting agent in the area you want to buy. 

Each lender uses their own formula, based on the income ration and LTV. This is to ensure they have a safety net in place if rates rise. Ask us at House and Holiday Home Mortgages to talk you through how the detail works. 

You often need to be a current homeowner, but there are instances where lenders will accept exceptions. For example you could be a live-in School Teacher or Church Minister. Also, a holiday let can be your first buy to let mortgage.

Generally, it will be more difficult to get a loan and it will be down to each person’s different circumstances. Having a credit report to hand is useful and be prepared to discuss the details of your circumstances with an adviser.

Many holiday let lenders are residential lenders so they want to lend against property that is easily saleable to anyone, not just holiday let investors. They want to lend on a property that is lettable, not just liveable. 

This means it should be in good condition from the time you make an application. A “Project” may well require bridging finance. Properties on holiday parks, properties of unusual construction, or properties that have restrictions on who they can be sold to, all present different and sometimes difficult challenges and each should be fully discussed with an adviser at the initial enquiry stage.

Please ask us about properties that have annexes or more than one property on the title deeds. Generally, these deals are harder to place and will need an experienced adviser to help you find the right deal. 

Expat and limited company holiday let mortgages are available. Please always seek an experienced accountant’s advice if you are looking to buy a holiday let property through a limited company. 

Rules and availability all vary and do so from time to time, particularly in the current climate. If you want to know more about whether you’re likely to meet a lender’s criteria, please get in touch. 

What If A Property Requires Refurbishment?

If the property that you want to buy needs refurbishment, then it could be difficult to secure a holiday let mortgage immediately. This is usually because a lender wants the property to be able to generate income as soon as possible. Refurbishment can take time, during which period the property is not being rented out. 

In this instance, a bridging loan could be appropriate. A bridging loan allows you to borrow the money required to purchase a property quickly, with no monthly payments. This gives you time to refurbish the property with no immediate mortgage commitment. Instead, the bridging loan is paid off at the end of the mortgage term (usually 12 months) with interest. 

In the context of a holiday let, the bridging loan would be repaid with the longer-term holiday let mortgage which is then repaid on a monthly basis.

The team were fantastic in getting our mortgage for us. They went through every single step and explained everything. I’m looking forward to using them in the future.

Tom B - Swindon

The tax benefits that are associated with a holiday let mortgage

The way the HMRC views this type of mortgage makes it an even more attractive investment opportunity. For example, a furnished holiday let is deemed a business, which means all expenses from your rental income can be deducted before you are assessed for tax.

This includes any interest that is being paid on your mortgage. This is not the case for a buy-to-let mortgage, as the tax process here is changing. It is becoming less favourable for additional-rate and higher-rate taxpayers.

Tax advice should be sought before making any decisions.

Can I Visit And Stay In My Own Holiday Let Property?

You can, however it must be available to let for at least 210 days per year and actually let out for 105 days. How much you are able to visit your property is perhaps dependent on the income needed to be generated by paying guests over the year. 

In addition, allowing friends and family to stay for no or reduced costs does not count towards your commercial letting period. 

Securing a Holiday Let For Retirement

Purchasing the right property now as a holiday let – letting pays mortgage until retirement when it switches to main residence

My people wonder if it is a good strategy to buy a holiday let as a home that they can retire to in the future. On the face of it and at top level this concept makes a lot of sense, but there are important considerations

Wealth Warning. Property prices can fall as well as rise and void rental periods are a possibility that landlords should always consider. 

What Other Costs/Fees Are Related To A Holiday Let?

When purchasing a holiday let property, there is obviously the mortgage to be repaid, but as with most property purchases, there are other costs to be factored into the equation:

Podcast

Beginners Tips for First Time Holiday Lets

How we can help

At this moment in time there is only a small handful of Holiday Let lenders.

Because of this, a lot of advisers seem to try and use Buy-to-Let mortgage products but that simply can’t be done. We’ve heard too many tales of people losing out on properties because they’ve been advised to sort a Buy-to-Let mortgage rather than a Holiday Let mortgage.