I wanted to talk a little bit about holiday let mortgages this time around as I have seen a spike in applications and enquiries recently. The global pandemic, lockdown and ongoing overseas travel restrictions have created a huge demand for ‘staycations’. Investors are taking advantage of this revenue stream, along with the stamp duty holiday and low-interest rates and investing in holiday lets. I have detailed below some of the main considerations when it comes to completing one of these transactions.
A holiday let mortgage means that you’ll be renting a holiday property out most of the time, with only occasional use by yourself or friends/family members. Holiday let mortgages are a niche type of finance product, and it’s common to find that lenders offering them are the smaller-sized building societies. Just because it’s a niche product, it doesn’t mean that this kind of mortgage isn’t readily available.
Some of the criteria include but are not limited to:
- The applicant (or the lead applicant) will need to already own their own home (in most cases)
- The applicant/s must be able to raise a deposit of at least 25%
- The applicant must have a minimum income (differs between lenders)
- You can only spend a certain amount of time in the property yourself over the year (90 days for example)
Normally, you’ll be able to borrow up to 75% of the property’s value for a holiday-let mortgage (similar to standard buy to let). If you can bring that figure down to around 60%, you’ll likely access some better mortgage deals too. Your lender will probably be looking for returns where at least 125% of mortgage interest payments can be covered (when calculated using a 5.5% interest rate). For example, for a mortgage of £100,000 (£100,000 X 5.5% = £5,500 / 12 = £458.33 X 125% £572.92) there would need to be a minimum average monthly rent of £572.92.
With a standard monthly buy to let this would be verified by either an AST (tenancy agreement) or a mortgage valuation. Whereas the income projection for a holiday let is generated using information from either a national or local holiday letting agency. Evidence of this projection will be required at the mortgage application stage, where it’s then eventually supplied to the lender’s surveyor to comment on as part of the overall surveying process. Typically, they will base this on an average of low, middle and high season rental figures. This approach is taken because it’s a well-known fact that income generated from holiday homes can be a very ‘seasonal’ business, with lots of variation, so lenders often look to a holiday letting agent for realistic advice on the market in a certain geographical area.