It matters to a mortgage lender how you intend to use the property you are buying.
If the property is to be your main home, for instance, the lender will line up a residential mortgage for you as the owner-occupier and assess the affordability of the loan in terms of your income, job, outgoings, credit history, and so on.
If you are buying a property to let to paying guests, on the other hand, it is an entirely different ballgame as far as the mortgage lender is concerned. The lender is now interested in the business proposition of your buy to let plans, principally based on the rental income the property is likely to generate.
A holiday let mortgage appears to be a hybrid between these two. For part of the year, your holiday home might be used by you and your family as the owners of the property; at other times, it may be let to short-term tenants and holidaymakers.
According to figures released by the Ministry of Housing, Communities & Local Government on the 9th of July 2020, 38.8% of all owners of second properties in the UK described them as holiday homes, while a further 34.7% described them as investment properties.
What is a holiday let mortgage?
A holiday let or holiday home mortgage, therefore, recognises these special features – doubling up as a property both for you and your family and to those paying guests who stay there.
Unlike regular buy to let property, however, your holiday let is – by definition – likely to be a seasonal business only. Instead of the assured shorthold tenancy agreed by the majority of tenants making your let property their main home for at least six months or longer, your holiday tenants are likely to be staying for only a matter of a few weeks – or less.
Although your holiday let mortgage lender will attempt to calculate the potential income from seasonal tenants, the task is naturally more difficult than for permanently let property. The risks are more significant for the lender. The lending criteria will, therefore, be stricter. And interest rates may be higher.
Can I use a buy-to-let mortgage for a holiday let?
For those reasons, your mortgage lender is almost certain to insist on a specialist holiday let mortgage rather than a standard buy to let mortgage.
Your holiday home is likely to be let on a seasonal basis only rather than the longer-term, more predictable assured shorthold tenancies typically associated with buy to let businesses. You may, therefore, find it more challenging to make the business case for your holiday let – and any prospective mortgage lender will need to investigate your financial circumstances and the potential for the let property to earn a steady income.
Can you get a mortgage on a holiday let?
The staycation has become increasingly popular in the UK. The website Statista reports that a record 60.45 nights were spent by staycationers in this country during 2019. It is further estimated that around 20% of those nights were spent in self-catering holiday let accommodation.
Unsurprisingly, given that growing demand, UK holiday home mortgages are becoming relatively commonplace with lenders actively competing for borrowers’ business.
Applications for holiday let mortgages must continue to be scrutinised carefully, of course, with a focus on both the applicant and the property itself – whether it is freehold or leasehold, for example, and the strength of the lettings business proposition.
How much can I borrow with a holiday let mortgage?
How much you can borrow depends on a whole host of factors relating to your own financial circumstances and the likely appeal of the property as a holiday let. Your projected rental income from holiday lets, of course, is a critical measure of the likely success of the business.
That measure is complicated by the fact that rental income is subject to – potentially extreme – seasonal variations (in contrast to the income from an assured shorthold tenancy, for instance). Your lender may calculate an anticipated rental income, therefore, based on the averages across low, mid, and high-season rates, with a stress test of potential variations and slumps in income influencing the rate of interest you might be offered.
What are the costs associated with a holiday let mortgage?
The principal cost is repayment of your holiday let mortgage, where the rate of interest you are offered is likely to make a significant impact. Those rates are typically higher than for either a standard residential mortgage or a buy to let mortgage – reflecting the increased risk of the transaction to the lender.
The cost of your mortgage repayments will also be determined by the size of the deposit you can offer and the price you paid for your second home.
As the HomeOwners Alliance (HOA) points out, you can offset the cost of mortgage interest repayments against your rental income as far as your income tax liabilities are concerned.
Furthermore, there are also special tax rules which apply to your income from a holiday let if it is let furnished. It must be furnished to allow “normal occupation” and be available as a holiday letting for at least 210 days of the year.
The costs of maintaining and keeping your second home in a good state of repair may prove more expensive than you imagined. At the same time, you must also take into account ongoing expenses such as insurance, council tax, and utilities, plus lettings and management agency fees.
Can I get a holiday let mortgage with bad credit?
While it is by no means impossible to secure a holiday let mortgage if you have a bad credit history, you are almost certain to find it difficult – with a limited pool of potential lenders.
Whatever type of mortgage you want to borrow, bad credit gets you off onto the wrong foot. For a holiday let mortgage, you are likely to be even more disadvantaged since you are competing for a relatively rare niche product.
A mortgage adviser specialising in applicants with bad credit and with expertise and experience in the market for holiday let properties may be able to offer help and guidance.
What about holiday let mortgages for overseas property?
If you want to buy a second home abroad, you may also need a holiday let mortgage. In that case, you have broadly two options – to arrange a mortgage through a local bank or lender in the country where you are looking to buy or arrange an overseas mortgage with a UK lender.
If you chose local finance, you must be prepared to negotiate the potentially arcane rules and practices of your host country in a language with which you may not be perfectly fluent. You are also at far greater mercy of fluctuating foreign exchange rates.
A safer bet, therefore, might be to contact a holiday home mortgage broker who will find the most appropriate deal for you from one of the several UK lenders now specialising in overseas mortgages.