How Do Holiday Let Mortgages Work
If you’re planning to run a holiday let as a side venture or full business, you’ll need to understand how holiday let mortgages work in order to properly leverage the lending you need to buy, update or convert the property to use as a holiday let.
From the country’s most coveted holiday cottages to new apartments built for short breaks in city centres, there’s a diverse offering on the market. Deciding on the right properties for your new business is a matter of research and understanding. Like traditional buy-to-let investment, you’ll need to grasp the details of mortgage lending before you can make the best choice.
Table of Contents
Here at Rangewell, as specialists in finance, we can help guide you through the lender’s market and the process behind holiday let mortgages – it’s our job to arrange finance on your behalf, at no cost to you, to deliver the best possible terms and rates for your needs.
Many high street banks won’t offer you a holiday let mortgage. Alternative banks and lenders are usually a better option as they understand the details of the holiday let sector and can make offers based on the reality of let ownership.
As part of our commitment to helping holiday let businesses expand or get started, we’ve created this guide to holiday let mortgages so you can ensure you’re well-equipped before you delve into your new business.
How to buy property for holiday lets
Buying a property to use as a holiday let is a question of doing the right level of research. Some properties already have history as holiday lets, whilst others are standard residential or commercial units you can convert into a holiday let.
To meet HMRC’s FHL criteria, you have to offer the property for short-stays to guests. It must be available for 210 days per year, let for at least 105 of those and furnished adequately. Bearing all of this in mind, finding the right property means choosing something that will appeal to tourists and is suitable for your budget. You’ll need between 25-30% as a deposit before you consider applying for a holiday let mortgage.
Once you’ve shortlisted some suitable properties, you’ll then need to apply for a mortgage like you would with a standard residential home. However, holiday let mortgages are distinct and require a more tailored approach.
What is a holiday let mortgage?
A holiday let mortgage is a loan offered specifically for holiday lets. Like normal mortgages, this is a significant loan which is secured against the value of the property. The similarities, however, end there, so much so that standard residential and even buy-to-let mortgages exclude holiday lets from their terms and conditions.
Lenders, like other institutions such as HMRC, have a specification definition for holiday lets, known as ‘Furnished Holiday Lets’, these are properties which are furnished and you let to guests on a short-stay basis for most of the year.
Some lenders offer interest-only holiday let mortgages and standard repayment mortgages, whilst others may not permit interest-only lending to holiday lets.
Holiday let mortgages are based on the specific circumstances a holiday property will encounter. The lender will generally assess the risks and overall security considerations around the property before they offer terms. For holiday lets, the lender’s perceived risk is greater because you don’t have guaranteed income and occupancy may vary. Additionally, guests can damage and devalue the property – so lenders will want you to have robust insurance in place.
Differences between a buy-to-let and holiday let mortgage
The main differences in these mortgage products comes down to the intended usage of the property. Buy-to-let investors aim to secure long-term tenants who sign legally-binding tenancy agreements, which de-risks the mortgage for a lender and therefore attracts favourable terms.
Holiday lets are a recognised tax term, with HMRC requiring the property to be available for 210 days per year and let at least 105 of those. Stays must be less than 31 days and any letting to friends or family doesn’t count.
The main difference and advantage is that a holiday let mortgage is taken out as a business, so you can deduct interest payments from rental income to reduce profits and decrease your tax burden. Buy-to-let mortgages don’t allow for this and are treated as investment property.
Another key difference is that a buy-to-let mortgage specifically excludes you from living in the property. As a holiday let mortgage owner, you can theoretically enjoy the property as a holiday retreat outside of the 210 days per year you must offer to guests.
What are the requirements for a holiday let mortgage?
Mortgage lenders are generally more hesitant when offering holiday let products due to the perceived risks. As such, the lending criteria can be more strict than other investment products. Some of the most important include:
- Personal circumstances: lenders look at your personal history and position when deciding what to offer. They’ll assess your income, age, experience as a property investor and your existing residence. Some lenders will not offer you a loan if you have multiple holiday let properties.
- Deposit: lenders want you to offer a sizeable deposit to reduce their loan to value (LTV) rate. Expect to put in as much as 25-30% of the total property value for an LTV of 75-70%.
- Rental income: if you’re new to the industry, you’ll need to create projections as part of your business plan. Lenders will scrutinise your projected rental income to determine their offer. If you’re remortgaging an existing holiday let, you can use existing income figures instead.
- Potential let: the property you’re considering heavily impacts the loan offer. Older properties that are in high-risk areas and unsafe postcodes will cause more hesitation for the lender. Modern lets that are well-maintained and located in popular tourist areas will be a better option.
Alternatives to holiday let mortgages
Holiday let mortgages are a specific kind of loan, designed to help you purchase the property you plan to let. Unfortunately, criteria can be strict and terms may not be as favourable as you expected unless you go through a broker like our team here at Rangewell. Some alternatives include:
- Bridging loans can help you snap up property at auction or in other time-limited circumstances. They tend to come with high rates and very short term lengths, but are perfect for securing the purchase when time is crucial. Once you’ve bought the property, you can then remortgage to a more favourable option.
- Property loans such as renovation finance MAY be suitable depending on your intentions. For example, if you’re a contractor you may borrow to renovate a property you already own and then turn that into a holiday let.
- If you own land, you may be able to build your own holiday let. To do this, you’ll need development finance rather than a mortgage, which is subject to unique criteria and lender expectations. Visit our property development finance page to learn more.
Once you’ve decided on your property and learned everything you need to know about holiday let mortgages in this guide, get in touch with Rangewell to ask any further questions and secure the finance you need to become a holiday home business owner.