Your holiday let mortgage questions answered
With worries over Brexit and the low pound encouraging UK residents to ‘staycate’ and foreign visitors to holiday in the UK, the demand for holiday lets is undergoing something of a boom. As if this isn’t a good enough reason to invest in a holiday let property on its own, holiday let investment benefits from tax advantages unavailable in traditional buy-to-let property, and yields averaging around 10% or more. Not surprisingly, this combination of factors is causing something of a tailwind in the holiday let sector, with many property investors employing a staycation investment strategy.
To take advantage of these exceptional investment dynamics, you won’t be able to use a buy-to-let mortgage. However, there are mortgages available to finance holiday let property investment. In this article, you’ll learn about holiday let mortgages and alternative financing strategies.
Why can’t you use a buy-to-let mortgage to finance holiday let investment?
Most buy-to-let mortgages have conditions attached to them that stipulate the property is to be let on an assured shorthold tenancy agreement, with fixed terms of a minimum of six months. Therefore, letting for shorter than this will break the terms of the mortgage.
How will the lender know your property is a holiday let?
Lenders are a little smarter than many make them out to be. They may check holiday let websites (such as Airbnb) for evidence that your property is a holiday let and not a buy-to-let. If the local authority receives complaints about noise and the amount of people ‘moving in and out’ of your property, it could notify the lender.
If you have financed a holiday let property investment with a buy-to-let mortgage, the lender could ask you to repay the loan in full. That’s not a happy situation to be in.
Are holiday let investment mortgages readily available?
As more investors are buying holiday let property, more lenders are joining the market. However, there aren’t as many products available as there are in the buy-to-let market. Therefore, you should use a mortgage broker to access the banks, building societies and specialist lenders who do offer holiday let mortgages.
What types of mortgages are available to finance holiday let investment?
Just like the residential and buy-to-let mortgage market, several types of mortgage are available. These include fixed-rate mortgages, discounted rate mortgages, and flexible rate mortgages. As with buy-to-let mortgages, you will probably borrow on an interest-only basis.
What deposit will you need to secure a holiday let mortgage?
The size of the deposit you need varies between lenders, and also according to the mortgage product you take. As a rule of thumb, you should expect to pay a minimum of 25% of the value of the property as a deposit. The larger the deposit you pay, the better terms you are likely to be offered.
How do lenders assess?
Most lenders will assess the viability of lending on a holiday home based upon long-term rental income (i.e. as a buy-to-let property) rather than short-term rental income (i.e. as a holiday let). However, as the market becomes more competitive and matures, more lenders are considering the letting income achievable by reference to the history of the property or by speaking to a local holiday letting agent.
Lenders will want to see various financial statements, such as bank accounts and credit accounts, and may consider personal income from other sources when making their lending decision. Most likely, though, is that lenders will require letting income of at least 125% of mortgage interest payments.
What fees will you need to pay?
The fee structures are similar to other mortgage products. You may have to pay an arrangement fee, survey costs, legal costs, and, of course, stamp duty and the stamp duty surcharge.
What alternatives are there to financing investment with a holiday let mortgage?
There are several alternatives you might consider a holiday let mortgage. If you have the funds available – either in cash or in a volatile stock market fund, for example – you may decide to use these to benefit from the potential capital gain and high-income yield offered by investment in a holiday let property.
Alternatively, you could remortgage your existing home to release equity or, in some exceptional circumstances, you may be able to access finance via a personal loan.
Whichever funding method you select, choose wisely:
- Run through the numbers
- Be conservative in your cash flow projections
- Consider the risks as well as the potential profits
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