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If you're looking to finance your holiday letting, you might find yourself wondering, "how do holiday let mortgages work?"
The lending criteria for holiday let mortgages are different from traditional or buy-to-let mortgages. With fewer lenders in the holiday let market, it’s important to understand the criteria you’ll have to meet in order to get a mortgage.
Each lender will have its own set of criteria, ranging from minimum income requirement to minimum loan value. Here are some holiday let mortgage criteria that you should be aware of.
Do I need a specific buy to holiday let mortgage?
Typically yes, a traditional buy-to-let mortgage will make it a condition of the loan that you can only let the property on an assured shorthold tenancy; this is not suitable for short term holiday lets.
Similarly, a traditional residential mortgage may also have restrictions that prevent you from letting out the property at all.
What's the minimum income for a holiday let mortgage?
Lenders will usually stipulate a minimum income requirement. The minimum income will vary depending on the lender; it could be anything from £10,000 to £40,000.
The minimum income requirement will also be affected by your status as either a sole or joint applicant. For example, for a sole applicant, the minimum income could be £20,000; for a joint applicant, one applicant must earn a minimum of £20,000 or there should be a combined joint income of at least £30,000.
You’ll need to provide the lender with your employment figures if you are employed, or the last three years of accounts, if you run a business, as proof that you meet the criteria for the minimum income.
Does the type of property matter?
To get a holiday home mortgage, your property must be considered as suitable security to allow for lending. Lenders will look into the title deeds of any prospective holiday let to ensure that there are no easements or covenants that might limit the property’s use as a dwelling: this could impact the value of their security. They will also be keen to understand if the property deeds contain any clauses that might prevent holiday letting as an activity.
You’ll also need to meet the criteria for the minimum property value of £50,000, irrespective of location.
Is there a minimum deposit for a holiday let mortgage?
If you're wondering how much deposit for a holiday let mortgage, the good news is, you’ll need a reasonable deposit when applying. Typically, expect to pay a minimum deposit of 25% to 30%, while interest rates and fees tend to be only slightly higher than mainstream residential mortgages.
Does my personal situation matter?
If you’re applying for a holiday let mortgage, you must already own your own home and be over the age of 21.
Whilst it’s normal to see holiday let mortgage applications for single and joint owners, most lenders will allow up to four applicants to be named on the application form. However, not all will be counted when it comes to the affordability test!
How does rental income affect a holiday let mortgage?
Lenders are primarily concerned about your ability to repay the debt - in the case of a furnished holiday let, this will be determined by the rental income you are likely to achieve from the property. Mortgage lenders will typically expect you to achieve a gross rental income from your holiday let that is 145% of the mortgage payments, when calculated at 5.5% interest rates. This is known as a stress test.
As there are strict criteria which need to be met, lenders will require proof of gross rental income to ensure that the mortgage payments can be met by the holiday let. To get an estimation, it’s advisable to consult a reputable holiday letting agent who can provide a realistic rental projection.
At present, lenders are generally not willing to accept rental figures created by the property owner if they are self-marketing. Therefore, in order to get a holiday rental mortgage, using the services of a professional agent is essential.
How can I estimate rental income?
Speak to a reputable holiday letting agent like holidaycottages.co.uk. Our team will be able to provide you with a free, no-obligation appraisal of your future purchase, including realistic rental projections you can present to your holiday home mortgage provider, and will also be on hand to guide would-be owners on a range of topics from current legislation to making your property dog friendly.
Is there a maximum portfolio limit?
Some mortgage lenders will have a limit on the number of properties in your portfolio. For example, if you hold buy-to-let properties, the lender might state a maximum portfolio of ten mortgaged rental properties. Some holiday let lenders will only allow one holiday let in your portfolio, while others are more flexible.
What's the maximum loan to value (LTV) for a holiday let mortgage?
LTV is the maximum amount a lender will agree to loan you as a percentage of the property’s value. If you’re applying for a holiday let mortgage, the maximum LTV will be around 75%, so you’ll need a minimum deposit of 25%.
Lenders tend to specify an absolute minimum and maximum that they are willing to lend on a holiday let mortgage.
The minimum will vary depending on your lender but is likely to be around £30,000, whereas the maximum loan size is around £500,000 and can sometimes be capped at certain LTV levels.
What restrictions are there on occupancy?
While you’re allowed to stay in your holiday home from time to time, you’re not permitted to live in it full-time as your dwelling. Lenders will stipulate occupancy restrictions on the use of your property which you must adhere to.
Are there any other options available to finance my holiday home purchase?
Instead of borrowing directly on the new property you want to buy, you could consider remortgaging your own home to raise the money. The residential mortgage market is still very competitive at the moment and, whilst it will important to consider the tax implications of doing this, depending on your circumstances, it still could be a very cost-effective alternative.
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Now you know more about holiday let mortgages, why not take a look at our range of holiday cottages for sale? These properties are all currently marketed with us and have been inspected by our Property team.
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This article was supplied by Holiday Cottage Mortgages (HCM) and holidaycottages.co.uk cannot accept any liability for the content. Please seek professional advice before taking or refraining from any action on the basis of the content of this article.
HCM focuses on sourcing and arranging holiday let mortgages and helping existing and 'soon to be' property owners navigate the potentially tricky path. HCM works to help people retain and acquire stunning holiday cottages throughout the country and make the most from their holiday letting experience.
Find out how you can maximise your holiday let's potential with holidaycottages.co.uk or get in touch today to speak to one of our friendly team.