So what are holiday let mortgages?
Holiday let mortgages are intended for people who would like to purchase a property that will be let on a short-term basis to tourists as a business.
It varies from a holiday home mortgage, where you borrow money to buy a second home that only you will use.
It is also distinct from a buy-to-let mortgage, where you obtain the money to purchase a property that will be rented out on a long-term basis.
What’s the difference between buy-to-let and holiday let?
One great thing with a holiday let is the amount you can receive is income is much more money than you could a typical rental property. Meaning that given you can let it out regularly, you could generate a much higher profit.
Furnished holiday lets are also handled differently by the taxman. They are classified as a business, meaning that you can still claim tax relief on mortgage interest. But, this is now being reduced on buy-to-let properties.
For a property to count as a holiday let, and not a buy-to-let, it must be ready for letting as furnished holiday accommodation for at least 210 days per year. That still leaves a massive 22 weeks of the year when you can enjoy your holiday home.
Traditional residential mortgages do not permit you to rent out your home, and a buy-to-let mortgage may not be suitable.
One problem with a buy-to-let mortgage is to work out your affordability. The lender will prepare an annual rental figure. You are basing this figure on the assumption that it will be let on an assured short-hold tenancy of around six to 12 months.
That does not work with a holiday let because you are letting it out for a matter of days rather than months. Meaning most people aspiring to buy a holiday let will not meet the lending criteria for a buy-to-let mortgage.
Holiday let earnings will vary. In peak months, your revenues could be higher than a buy-to-let income, but it is not guaranteed for months. So, the value a lender will loan you with a holiday let mortgage is based on an income forecast figure rather than a simple rental income projection.
Your income will also be examined when assessing you for a holiday let mortgage. A lender will want to know you can cover the mortgage when the property is not occupied.
The kind of property you buy will also influence your ability to get a holiday let mortgage.
Lenders want to understand that you can sell the property with ease. So lenders will not typically provide you with a mortgage on a holiday park, or someplace that can only be a holiday home.
Holiday let mortgage lending criteria
The lending guidelines for a holiday let mortgages are stricter than with a residential or buy-to-let mortgage.
When evaluating you, a lender will study your income as well as assumed rental income from the property. They will also look at your outgoings. So, be aware that if you already have a substantial mortgage on your property that could affect what you can borrow for a holiday let. Because the lender needs to make sure you can afford to meet the repayments on their mortgage if there is a phase when the property is not let.
How much does holiday let mortgages cost?
The interest rate on holiday let mortgages tend to be a bit higher than the prices on a residential mortgage. Currently, the rates are between 2%-4% depending on how much deposit you have available. But, remember you will be able to offset your mortgage interest payments against your rental income for tax purposes.
How much can I borrow?
To get a holiday let mortgage, you’ll be required to be able to provide at least a 30% deposit. That is because it is riskier for the lenders of a holiday let than with a standard mortgage or buy to let where the tenants will be long term. Lenders tend to look at whether the property will provide a rental income of typically 125% – 145% of the interest payable on the mortgage.
So, as a typical example, if you wanted to buy a holiday, let worth £250,000 you would need to be able to put down at least a £75,000 deposit. The property would additionally need to be able to generate at least £11,000 a year rental income, based on a mortgage interest rate of about 4.5%.
Alternatives funding methods for a holiday let mortgage.
You do not have to use a mortgage to buy your holiday let. You could look at a different way to finance the property.
If you can afford it, then you could buy a property mortgage-free. This way, you no longer have to factor in the cost of mortgage repayments or worry about receiving the mortgage acceptance.
Another alternative is to remortgage your home to free up enough money to place a deposit on your holiday let mortgage. If you have paid a large amount of your mortgage off, or if your current property has grown in value, you might even be able to utilise the equity to buy your holiday let mortgage-free. Although you then wouldn’t be able to subtract the mortgage interest from your own home when working out how much you can make from the holiday let.
What companies provide a holiday let mortgage?
Most of the leading lenders don’t offer holiday let mortgages. Principality Building Society, Leeds Building Society and Bath Building Society all offer lending options on holiday lets.
The easiest way to get the right mortgage for your holiday-let, and guarantee a successful application, is to use a mortgage broker. They understand the market and may be able to access specialist mortgages that you can’t find on the open market.
The rise of companies such as Airbnb
It’s almost impossible not to have heard of Airbnb these days, and they have provided an excellent platform for users to upload their property. Meaning you don’t have to own or build you’re a website from scratch if you would like to earn money from your holiday rental. But like most good things people have now started to exploit the rental market. They are converting properties that are ill-equipped for their purpose, which means that villages and communities are beginning to clamp down on Airbnb properties, and some areas now have a complete ban. So if you’re planning on renting your property out using AirBnB check first to see if there are any restrictions on the property you are buying.
DISCLAIMER: These articles are for information only and should not be construed as advice. You should always seek advice prior to taking any action.