Our Guide to Holiday Let Mortgages
One in ten British individuals now own a second home, revealed the Telegraph newspaper in August 2017. Not only are these homes used by their owners, they are also frequently let to other holidaymakers in search of short-term holiday lets.
With pressures on the pound and a succession of seemingly record-breaking hot summers in the UK, the popularity of the “staycation” is also gaining ground. According to a “Staycation Index” compiled by Sykes Cottages, 56% of all Britons took a staycation in the UK in 2017, whilst the final numbers for 2018 are estimated to top 74%.
Add to this the growing numbers of visitors looking for Airbnb accommodation in this country and there are clear incentives for owning a second home for short term holiday lets.
And despite the introduction in April 2016 of a 3% Stamp duty surcharge on the purchase of many second homes, investment in holiday lets is also encouraged by the tax relief available on furnished holiday lettings.
Can I use a BTL mortgage for a holiday let?
If you are interested in investing in such a property, the likelihood is that you may also be interested in holiday let mortgages – and it may be in the very nature of the term that your first thoughts turn to a buy to let (BTL) mortgage.
A standard buy to let mortgage is an inappropriate vehicle for funding the purchase of a holiday let property for a number of reasons:
- as an article in Landlord Zone explains, a holiday let is likely to require a planning change of use and the need for re-financing;
- the landlord of a holiday let is unable to grant assured shorthold tenancies – the most common form of tenancy agreement in the private rented sector;
- in effect, a holiday let mortgage is a hybrid mortgage, reflecting both the owner’s occupation of the premises from time to time and its rental to tenants at other times – a holiday let mortgage combines the requirements of both a standard residential mortgage for owner occupiers and a regular buy to let mortgage for full-time landlords;
- in short, mortgage lenders apply quite different criteria to the granting of holiday let mortgages – even for short term holiday lets – compared to residential mortgages for owner occupiers and BTL mortgages for landlords.
Why are BTL mortgages easier to get than holiday let mortgages?
BTL mortgages are granted on the strength of the viability of the property as a business investment.
Typically, for example, a buy to let property generates steady rental income from the granting of assured shorthold tenancies (AST) by the landlord and the economic viability of the investment – the affordability of the BTL mortgage – is assessed on that measurable income stream.
Currently, BTL mortgages tend to be approved where the prospective landlord is able to show rental income of at least 125% of the projected monthly mortgage repayments. This is generally termed the “rental coverage”.
Holiday let mortgages are typically more difficult to arrange, since it is much more difficult to assess with any degree of reliability the income stream generated. Assured shorthold tenancies, for example, are inappropriate for the short-term rental requirements of visiting holiday makers looking to rent for, say, a couple of weeks only.
Furthermore, the planning departments of many local authorities impose usage restrictions on holiday lets – thus, further restricting the income or rental coverage potential.
Because a regular buy to let mortgage may be easier to arrange than a specialist holiday let mortgage, some owners may be tempted to apply for the former even when the intention is to use the property as a holiday let. As the Landlord Zone article warns, however, this may amount to mortgage fraud and mortgage brokers who knowingly engage in arranging such lending run the risk of being struck off.
If you already have a buy to let mortgage and intend using the property as a holiday let, therefore, you need to remortgage on the basis of a new holiday let mortgage.
What is the difference between a second home and a holiday let?
Just as the term suggests, a second home is one that is used purely by you and your family as a second retreat or escape from your principal place of residence. By the same token, the term holiday let clearly indicates that the property is let to paying guests or short-term tenants.
Mortgage lenders distinguish strictly between the two types of mortgage required.
So, too, do insurers. If you arrange standard buildings and content insurance for a second home that is used as a holiday let by paying tenants, any claim you subsequently make may be rejected. Failure to have arranged the appropriate form of insurance may also breach one of the fundamental conditions of your mortgage – namely, that appropriate and adequate insurance is maintained at all times.
As previously mentioned, there are tax advantages to your letting a holiday let as a Furnished Holiday Letting. The rules are spelled out in the webpages published by HM Revenue & Customs (HMRC) – essentially, requiring the let property to be adequately furnished, available for letting for a minimum of 210 days each year, actually let for at least half of those 210 days, and let with the owner’s intention of making a profit.
What are the holiday home mortgage income requirements?
Typically, your holiday let property needs to generate an income of at least £20,000 to £40,000 per annum (although some holiday let mortgage lenders may accept a lower threshold), representing a minimum 140% rental coverage – in other words, rental income is at least 140% of your monthly mortgage repayments.
A minimum deposit of 25% of the purchase price of the holiday let is also required – although, clearly the bigger your deposit, the less you need to borrow, the less risk taken by any mortgage lender, and therefore the better the chances of your securing the holiday let mortgage you need.
Some specialist holiday let mortgage lenders now offer products specifically designed for Airbnb letting or via websites offering lettings directly by their owners.
Arranging a holiday let mortgage may leave you more to think about and the help and guidance of experts with experience in this field – such as ourselves here at Needing Advice – can ensure that you arrange the appropriate mortgage.
You may also want to seek suitably qualified professional advice with respect to the tax implications of your venture into the business of short term holiday lets.