We were delighted to be invited to speak at the Short Stay Event in London in March. An award winning show for the UK Short Stay Industry. Below are the highlights of the presentation.
Understanding the World of Holiday Let Finance
We are professionals in the world of Holiday Let Finance, a very specialist area of lending. We have been working in this field since 2015, based in Gloucestershire, we help people not just in our local area or the UK but all over the world. We really understand what customers like you need from holiday let criteria and holiday let products.
Post Covid we are in a tougher, harder space for customers to find Holiday Let Mortgages so now more than ever we would urge you to speak to a specialist adviser.
Why is Holiday Let Lending a specialist sector?
We often speak to customers who have tried to purchase a holiday let on a buy to let mortgage. The way you are letting the property out is going to determine the type of mortgage that is suitable for that property.
You may have gone through a great deal of the process getting a mortgage offer and working towards completion. However, once the conveyancer hears that the property is not being used as a BTL but a holiday let and advises the lender, it can negate the mortgage offer and the deal can fall through.
We work with around 60 different mortgage lenders, only about 18 of them offer Holiday Let mortgage products and around eight of them do it well. Right now, as the market operates following the COVID-19 pandemic, there are even fewer lenders currently lending in the Holiday Let space.
That’s why it is important to understand you are going down the right route from day one. When you are working with a broker such as ourselves it is important that we obtain the right information from you so that we can recommend the right type of product for you.
How is affordability calculated in this sector?
Affordability is simply how much you can borrow. For a residential mortgage it’s based on income multiples and credit commitments you might have. For Buy to Let it is based on the 12 month rental expectations of that property e.g. a rental income of £1,200 per month. That’s going to give you an income of £14,400 on which a lender will assess your affordability.
Things are different in the holiday let market. As you will be aware there are peak seasons. So what we look for is a local letting agent to give some projections on what that property can expect to generate on a weekly basis and we average that over a low, medium and high season. So for example if we think that property could rent out at £1,000 per week, we can base that on 30 weeks, which would give you a rental income of £30,000. We can then work with that figure to talk to lenders.
So that figure would allow a lender to review allowing for their stress rates and calculations. They would be likely to lend in the region of £350- £375,000. The £14,400 on the Buy to Let model would probably allow you to borrow around £150,000. So working with people and understanding these numbers is important.
These are rough numbers and are for illustrative purposes only.
Other factors that come into play when looking to find the right holiday lender for you:
This is a viable rental channel for many. Some lenders historically have not liked lending to properties that have been rented out using Airbnb. For some of them, it depends on whether you are renting the whole property or partly through them.
Construction of the property
Timber frame? Thatched roof? It can restrict who will lend. Be upfront with your broker as it will affect their recommendation!
How often do you use the property you use yourself?
Sometimes restrictions are placed on how often you plan to use the property yourself.
Where in the country
Some lenders will not lend in Scotland or the Highlands, some are regional lenders.
Some will only lend through intermediaries
You may need to consider using brokers like us. So if you want access to the whole of the holiday let market and the best deal then perhaps you’ll need to work with a broker.
Previously been used as a rental?
Some will only lend on a property that has been let out previously, rather than used as a home.
Restrictions on properties
Properties with any restrictions on them are hard to place. This means properties such as those that can only be rented out for 11 months of the year. Despite often providing a great return, only three lenders in the country were prepared to offer a mortgage to that client.
The right type of mortgage
It is important that you have the right product in place, as not doing so can have implications further down the line.
If you have purchased a property using a standard residential mortgage and then move out and decide to make a rental income off the property for a holiday let, you can face problems with the lender if you need to refinance for any reason. The purpose has changed from residential to relying on being rented out throughout the year in peak and non peak seasons. You need to do with the property what you tell the lender you are going to; anything else could mean you’re breaching your mortgage terms.
If you wanted to build another dwelling on the property? As an example, you could be living in a popular tourist area and decide to build another dwelling on the property that can be used and rented out as there is high demand for short term rentals. When you go to refinance – suddenly you have a commercial dwelling on a residential mortgage title – there is only one lender in the country who would lend on that. Get advice early on!
Change of Strategy
Maybe you are a property investor already? Typically you may have funded property purchases through the Buy to Let channel? Perhaps the properties are in an area where there is a demand for short term rental instead, you may have done the numbers and you think actually I can do better lending this out on a short term basis? This may be the case but a traditional Buy to Let mortgage is not the right product to do this.
Just because it may be possible to “get away with” using the wrong product, it does not mean you should. Mortgage lenders and underwriters have access to the same sources of information as we do and if they are looking at a refinance request and come across your property on Airbnb? Unless they are doing a holiday let lending they are not going to lend to you.
The following are general criteria in the holiday let market. As with anything there are some exceptions to the rule, but this is a good guide to the types of things you need to consider when making yourself attractive to a lender and gaining finance in this area.
- They would be looking for you to have a personal income of £25,000 or more
- 25% Deposit – so you are invested in the property
- You can take the mortgage term to the age of 85, so if you are a 60 year old borrower you could put in a 24 year term and spread the payments over that time.
- You are typically able to borrow between £50,000 to £500,000
- They are likely to want you to already own your own home – this is so you have experience of paying mortgages, but also so you are not trying obtain a holiday let mortgage that you are then going to live in yourself
- Be UK based
- Clean credit profile
- No restrictions on the property – so if they need to repossess they will have no problems selling it
There are areas where some of these criteria can be stretched, so speak to a specialist broker with your exact situation and they’ll help advise what’s doable!