Find the right mortgage to purchase your dream holiday let

Home » Find the right mortgage to purchase your dream holiday let Published: 24th May 2022 This Article was Written by: Adrian Anderson   holiday home , investment property

With holidaying in the UK still popular, more individuals are exploring the viability of purchasing a holiday home.

During the pandemic ‘staycations’ became all the rage and their popularity doesn’t show any signs of diminishing. Given the recent international travel disruption and all the extended checks at airports which holidaymakers have faced, it’s not suprising. When you want to get away to relax, you certainly want the whole holiday to be as hassle-free as possible.

The popularity of sites like Airbnb are also making many consider letting out the holiday property when they aren’t using it themselves. As was the case in 2021, we are dealing with many more enquiries about holiday let mortgages.

A simple definition

It’s important to note that a furnished holiday let is a specific category of rental property in the UK. It’s classified as a ‘trade’ by HMRC who view it as a business and permit you to deduct your expenses from your rental income, including the interest you are paying on your mortgage (subject to certain conditions). Compared with a standard residential buy to let investment this is more generous, especially for higher rate taxpayers. Anderson Harris are not authorised to give tax advice and you should speak with an accountant about the tax benefits.

Holiday let income can be lucrative during certain months of the year but isn’t guaranteed all year round. The running cost of a holiday let, including agency fees and cleaning, can be more expensive than a standard buy to let arrangement. Saying that, if the property is purchased well and managed well, it can prove to be a strong investment.

Mortgage lenders’ cautiousness with holiday lets

A holiday let mortgage is designed for those seeking to borrow money to buy a property that will be let out on a short-term basis to holidaymakers as a business.

Mortgage lenders class this type of investment as a higher risk than a standard residential buy to let, because tenants will not be long term. It’s likely there will be periods over the year when the holiday let property will be vacant.

As a result, most lenders do not offer holiday let mortgages but that’s not to say these products aren’t available. A small number of specialist lenders and buildings societies fill the gap and, currently, rates are expensive compared to a mainstream residential mortgage or buy to let mortgage products.

Being savvy to the criteria

If holiday property letting is an area you are considering, it’s important to be aware of the criteria that often come with these mortgage products.

Due to the fluctuations in expected income, mortgage lenders will want assurances that you have personal income to cover the mortgage repayments if the property is not let out.

They often expect that that the property should be in an area with a demand for holiday lets. They will also require the property to be ready for holiday letting on the day of the mortgage’s completion.

There are also strict criteria to be met when it comes to rental income. Many lenders will require the rental income to be circa 145% of interest payable on the stress test rate of 5.00% or 5.50%.

Most lenders will allow you to stay in your holiday let from time to time, however you will not be permitted to live in the property full time. Typically, they will stipulate occupancy restrictions on the use of the property which you must adhere to.

What deposit contribution and interest rates to expect

For a holiday let purchase most specialist lenders usually require at least a 25% deposit. This will typically give you a mortgage product with 3.72% fixed for 2 years. Lower rate mortgages are available for those with a 40% deposit. With that higher deposit the 2 year fixed rate is currently 3.26% and the 5 year fixed rate is 3.44%. The bank product fee for these rates is £999.

An alternative

As an alternative means to raise funds for your holiday let purchase, you could consider borrowing against your main residence.

A cheaper form of borrowing could be against your main residence, particularly if have a strong personal income and significant equity in your main residence. This type of mortgage has historically been significantly cheaper than one for a holiday let.

The rates available for these types of mortgages with the mainstream lenders at a 60% Loan To Value (LTV) are circa:

2.58% for a 2 year fixed rate or
2.58% 5 year fixed rate.

Both products have a £995 bank fee. If you are re-mortgaging the bank will pay for the mortgage valuation and legal conveyance.

It is worth noting that the mortgage rates that the banks currently offer are currently being withdrawn and increased at very short notice.

Summary

If you’ve got your heart set on buying your dream holiday home, a holiday let mortgage could help and also give you a route for additional income, if the property is purchased and managed properly. It’s important to recognise the nuances of these mortgage products and the tougher criteria that comes with them.

As an alternative, you may wish to consider borrowing against your main residence to fund the purchase. You should however seek tax advice from your accountant when considering purchasing a holiday let.

The ongoing upkeep and maintenance of a holiday let may mean this type of investment is more time consuming compared to a standard buy to let residential property investment. The decision, therefore, warrants careful consideration and, as lenders in this field have different criteria, do speak with an independent expert for advice on the best financing solution for your individual circumstances and plans.

Contact our team of specialists on 020 7495 6633 or email enquiries@andersonharris.co.uk