Mortgage For Holiday Let Business

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Mortgage For Holiday Let Business

Mortgage for Holiday Let Business – Your Frequently Asked Questions

Listen below as Chris Needham talks you through

In less than 10 minutes, you’ll know a lot more about getting your Mortgage for Holiday Let Business.

What should people look for when buying a property as a holiday let?

The main thing is to find a suitable property in an area that will attract holiday makers and generate sufficient rental income. You will also need to meet the criteria of the lender. Some clients purchase property purely to rent out, while others may want to use it themselves for a number of weeks each year. The criteria varies for those two situations. You can also either own a holiday let property in your personal name or through a limited company. So there are a few questions to consider when deciding to buy a holiday let.

What kind of properties might be included in a holiday let business? How does that affect the lending process?

We’ve done a lot of holiday let mortgages on a variety of properties. They include standard detached, semis or terraced houses as well as apartments. The key thing is that the property needs to be in a location that lenders deem a tourist area, where there will be enough people looking for accommodation. Holiday let properties are let out on a furnished basis, unlike a traditional Buy to Let. The main considerations then are the potential rental income across the low, medium and high season – that will influence how much they’re looking to you can borrow. It’s also important to remember when you’re doing your research that some properties have restrictions on them, saying that they cannot be let out to holidaymakers. Obviously those properties would be unsuitable.

What costs should investors expect when taking out a holiday let mortgage? How do they compare to other mortgages?

They are similar to a standard Buy to Let Mortgage, in that you’ll need a deposit of at least 25% of the purchase price. Then there are all of the usual costs such as legal fees and survey fees. You’ll also need tax advice, so it’s worth speaking to an accountant in advance of any investment to understand the tax implications. You also need to understand how much the accountant’s going to charge you, as well.

Can I get a holiday let mortgage if I already have a residential mortgage?

Unlike traditional residential mortgages, holiday let mortgages are not based on an affordability assessment using your income, expenses and commitments. It’s all to do with the rental income of the property. So yes, you can get a holiday let mortgage on a property if you’ve already got a residential home.

Is investing in a holiday let a good idea?

Obviously it depends on the individual circumstances as I’ve mentioned, and it’s really important to understand the tax implications of owning a holiday let. Once you’ve found a property and you’ve talked to your accountant about how you plan to own it, that will help you understand the profit you might be able to make. It is certainly a popular type of investment at the moment. There can be certain tax advantages over a traditional Buy to Let property too so, yes, it can be a good idea.

What distinguishes a holiday let business from other rental property investments in the eyes of lenders?

With a Buy to Let property, in a 12 month period you may only rent it out to one person, or maybe two different tenants on six month contracts. A holiday let obviously has people stay just for a weekend or a week. Because so many people will stay in the property over the course of the year, there’s more risk to the lender. Plus, there could be a downturn in tourism to your area, which means the property would be empty. In that case, how will the mortgage be paid? On the other hand, if the property is busy and rented out all year it can lead to more wear and tear and potential damage to the property. So either way there’s additional risk there. It really is a different proposition to Buy to Let from a lender’s point of view.

What are the key differences between holiday let mortgages for limited companies and those for individual property owners?

Again it depends on personal circumstances and your overall objectives. For instance, are you planning to just buy one holiday let property or are you going to try and build a portfolio? I’d always refer you to a tax specialist before proceeding. Depending on how many properties you’re looking to own, your current income and where that comes from, the accountant can help guide you whether it’s better to buy in a limited company or keep it in personal names.

What tax implications should be taken into account when investing in a holiday let property?

There are different tax rules because you have to furnish the property for your guests. As long as the property is available to rent for the majority of the year, there can be some tax advantages. It’s also important to look at the wider picture and consider capital gains tax liabilities further down the line. So again I’d pass this one over to a specialist accountant to guide you through everything.

How long does it take from application to approval for a holiday let mortgage?

It’s similar to a traditional application on a residential mortgage. The lender assesses your circumstances, arranges a valuation of the property and also wants to understand the likely rental income that can be generated from the property. From submitting an application to getting the mortgage agreed and the offer issued, it’s currently taking around two and a half weeks – so it’s similar to other mortgages.

Is it possible to rent out a holiday property using a standard mortgage?

No, definitely not – that would be against the terms and conditions of your existing residential mortgage. Residential mortgages are for you to live in that property. The lender knows that you’re going to look after the property and that you’ll be there most of the time. A holiday let needs a specialist mortgage, where the lender is happy to take on the risk of a lot more traffic through the property.

What is the minimum deposit required for a holiday let mortgage?

You will need 25% of the purchase price for your deposit. There were some lenders previously that would accept a 20% deposit, but as lending has tightened up over the last couple of years those schemes have gone.

How long has BR Needham been specialising in holiday let mortgages?

It’s about six years since we did our first holiday let mortgage. We actually bought a holiday let property in Norfolk, so I did plenty of research in advance of that to make sure it was the right thing for us. I wanted to make sure I was choosing the right mortgage. So I have a lot of personal experience from that. Since then we’ve done holiday let mortgages for clients across Norfolk, Suffolk the Yorkshire coast and recently some in the Yorkshire Dales.  We do have a lot of experience in this area.

What options are available for financing a holiday let business if standard Buy to Let lenders are not suitable?

You really need to speak to one of the lenders that do specialist holiday let products, where they are happy with a property being advertised for short-term lets. That might be on your own website or on some holiday company websites.

How important is it to work with a lender with experience in this area?

As we mentioned, the amount you can borrow is based on the rental income potential of the property, and they all assess that in different ways. The specialist holiday let lenders are used to working with holiday let companies to work out what they think can be achieved from that property. So you definitely need a specialist lender.

What’s the maximum loan amount I can get for a holiday let?

Rather than being based on your income and any commitments you may have personally, it’s more about the property. The lender wants to understand how much it could be rented out for a week in the low season, the mid-season and then the high season. Those figures are usually obtained from a reputable holiday let company. The lender uses that to calculate the gross rent and how much they’ll lend. It really does vary, depending on the property, the area you’re buying in and the lender you’re using.  As always, speak to a mortgage advisor in plenty of time to understand what is achievable on properties that you may be looking at.

How do holiday let mortgages compare to traditional mortgages?

Not as many lenders offer these mortgages, but there’s still a decent spread of them, so we’ve got a bit of choice. Unsurprisingly, the rates are a little bit higher than a standard mortgage because of the risk the lender is taking on. The property might not be successfully rented out if there’s a downturn in tourism or 52 weeks of rain, for instance, but there’s also more risk because of the number of people going into the property. Those are the main differences that impact how the mortgage is assessed and the rates for applicants.

What is the process for applying for a holiday let mortgage?

Always speak to a broker with experience in holiday let mortgages. It’s very different to other types of mortgage. We help clients from the start of the journey, to make sure they understand the calculations that lenders use. Then, when they’re looking at properties they know whether the property will generate enough rent for the mortgage to be approved. Speaking to a broker right at the start of the process will mean you understand how much money you’re going to need as a deposit, plus for surveys, legals and accountants fees. Then, once you’re looking at properties you’ll get some idea of what they could generate and we’ll see what mortgages are available. Your property may be repossessed if you do not keep up repayments on your mortgage. The Financial Conduct Authority does not regulate some forms of Buy to Let Mortgage.

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At BR Needham, our qualified advisers do the hard work for you and help you make those important property purchasing decisions – whatever type of mortgage you’re looking at.

Mortgage for Holiday Lets (Part 2)

Continuing the conversation about mortgages for holiday let businesses with Chris from BR Needham.

What is important to know about investing in Buy to Let properties generally?

Investing in Buy to Let isn’t for everyone. It’s important to take tax advice right at the start. There can be different tax approaches if you’re buying a holiday let property compared with a standard Buy to Let property. If you’re looking to invest in either, take tax advice upfront. 

It’s also important to understand your objectives in buying the property. Are you looking for some monthly income from the rental to supplement your employed income? Or are you looking to buy the property for long-term capital growth? Your objectives feed into the type of mortgage we would arrange to suit your needs. So think about these things right at the start.

Are holiday let mortgages generally more expensive than traditional Buy to Let mortgages?

We’re recording this in July 2023 and we’ve seen increases in mortgage rates across the board, whether you’re buying a residential property, whether you’re a First Time Buyer or you’re looking for a Buy to Let investment property or a holiday let.

Because of the perceived risk on a holiday let property, the rates usually are slightly higher than on a Buy to Let property. On a traditional Buy to Let you usually rent that property out for a minimum of six months to the same people – whereas on a holiday let you’re looking for short-term rentals. Someone might just stay there for a weekend or a week. 

Because of that, the lenders perceive it as a more risky lending. There are also fewer lenders on holiday let mortgages. That means there’s less competition, so usually the rates are slightly higher.

What are the minimum income requirements for a holiday let mortgage?

With a holiday let mortgage, lenders are more interested in the rental possibility of the property rather than your own personal income.

They’re looking at how much the property will generate in rental income across a full year, taking into account low, mid and high seasons. Having said that, every lender is different and some still expect you to have a minimum income of maybe £25,000 or £30,000 from either employment or self-employment. 

What do lenders consider when determining who is eligible for a holiday let mortgage? What are the eligibility criteria for a holiday let mortgage?

For every holiday let mortgage you’d need at least a 25% deposit or 25% of equity in the property. Lenders are really interested in the property itself and where it is in the UK. It needs to be in a holiday destination. 

We’ve done quite a lot recently on the Yorkshire and Norfolk coasts – so it needs to be an area where lenders would think there’d be sufficient tourists looking for somewhere to stay. 

The key criteria are what rental income the property can generate, the location it’s in and whether the applicant has got a 25% deposit.

Can I use my existing holiday property as collateral for a mortgage?

We sometimes get enquiries where someone already owns a holiday let – it might be mortgage free. They want to raise money against that existing property as a deposit on another one. That is definitely something we can do. 

We’d look at how much income your property’s been generating over the last 12 or 24 months to work out how much money you’d be able to raise against that property. We’d also explain how much that’s likely to cost. 

What are bridging loans and could these be used for a holiday let business?

We don’t arrange bridging loans directly but we have referral partners for these. They can be helpful if someone sees a property for sale in an auction, or they are looking for a really fast sale. Not many buyers have the funds sitting in their bank account, ready. 

Sometimes arranging a mortgage can be too slow – it might take two or three months for approval and the legal side. Meanwhile a bridging loan is a source of short-term finance for property purchasing. It is usually quicker to arrange obviously – but because of that, it’s a lot more expensive. 

Once you have bought the property with your bridging loan, you can remortgage to replace that bridging finance with a standard mortgage.

What kind of lending products are available for those interested in investing in a holiday let property business?

Like all mortgages that we arrange, there are fixed rate deals, tracker rates and variable rates. We arrange some holiday let purchases on an interest-only basis. Some people do it on a repayment basis. 

Again, it goes back to those objectives – what you’re looking to achieve from the investment. Some people want to buy the holiday let property in personal names, whereas other investors come to us with a plan to buy six or seven holiday let properties through a limited company. They set up a specialist company to manage the ownership and rental of holiday let properties.

We have access to a number of fixed and variable rates and we can arrange that on an interest only or repayment basis. It depends whether you want to pay some of the capital off each month and reduce the balance over time, or leave the loan as it is and look for capital growth.

What role does location play in the decision making process of investing in a holiday let?

When you look at a normal Buy to Let mortgage, the lenders and their valuers will be assessing enough people are looking to rent property on a reasonably long-term basis in that area. Typically that’s six months or more. 

When it’s a holiday let mortgage, the lender is assessing whether there’ll be enough tourist trade in that area for people wanting to stay for a weekend or on a weekly basis all through the year. 

We’ve arranged a few recently up in Scarborough and Bridlington on the North Yorkshire coast and down in Norfolk as well. These are traditional tourist areas, close to the sea or perhaps up in the Yorkshire Dales – anywhere you’d go on holiday.

What should potential investors know about early repayment charges for holiday let mortgages?

When you lock in a fixed rate mortgage, whether it’s two years, three years or five years, there would be early repayment charges if you were to cancel the mortgage during that fixed rate period. 

Someone might buy a holiday let property on a five year fixed rate, but if after two years there wasn’t enough tourist trade, they might want to switch it to a normal Buy to Let. They might need to get out of the holiday let mortgage at that point and switch to a Buy to Let.

So it’s important to understand the potential cost of those early repayment charges. The same would apply if you decide to sell the property during the fixed term – there would still be an early repayment charge at that point. 

Speak to a broker at the start of the process to explore your requirements and objectives. Then we can arrange the most suitable mortgage, whether that be a fixed rate over two years or five years – or potentially a variable rate mortgage with no early repayment charges.

Where can investors find the right deals on holiday let mortgages? How can they compare different options?

Start by taking tax advice before you get too far down the chain, to understand whether investing in holiday let or even Buy to Let property is the right thing for you. At the same time, speak to a broker so we can explain the borrowing process. 

We’ll tell you the documents the lenders will require from us, how much income a particular property is likely to need to generate and whether it will be eligible. We can talk through all of the different schemes and the advantages of each. Then, when you’re ready to go, you know what you’re getting into and that you’re happy with the deals available.

Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it

The Financial Conduct Authority does not regulate some forms of Buy to Let Mortgage, Bridging loans, and tax planning and we act as introducers for tax planning

What distinguishes a holiday let mortgage from a traditional Buy to Let Mortgage? What advantages might it offer to investors?

A holiday let mortgage is a specialist mortgage only offered by a handful of UK lenders. There’s still enough of them for us to be able to shop around.

The yields from a successful holiday let property can be significant compared to a traditional Buy to Let Property and there can be some tax advantages too. So you definitely need a specialist mortgage, but there can be some tax benefits to investors.