Mortgage for Holiday Let Business
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Mortgage for Holiday Let Business
Richard Campo talks to us about mortgages for a holiday let business.
What are some common questions that arise for those looking to purchase a holiday let property?
The first two questions anyone asks in any context is how much can I borrow and how much is it going to cost. Then, related things are how much deposit you need and how the loan is assessed – we’ll get into all of that detail.
Specific to holiday lets, there are a lot of questions around where to buy and how you want to use the property – particularly whether you can use it personally or not.
A holiday let is almost like a hybrid between residential and Buy to Let mortgages in the way that they’re assessed. It’s fundamentally an investment.
What kind of properties might be included in a holiday let business? How does that affect the lending process?
A lot of people think of a holiday let as a picturesque little cottage with a thatched roof, right next to the beach… and banks hate that type of property.
A bank loves nothing more than a bog standard, traditional terraced house in a highly populated area. They’re easy to sell and they’re easy to value. The further you move away from that, the harder it becomes. If you do want that idyllic thatched cottage in a remote bit of Cornwall, it will have an impact on what lenders we go to.
With holiday let mortgages, we’re not talking about caravans, lodges and holiday parks. That’s generally a bit of a no-no. If you want to do that type of thing, the finance is best arranged with the holiday park itself. There’s sometimes a bit of crossover, if you’ve got a nice little property on a holiday park for example, but it all depends on the use restrictions. There are some grey areas.
But as a rule of thumb, the more standard, the better. The more quirky the property, the less choice we have in lending. That’s true of mortgages across the board.
What costs should potential investors expect when taking out a holiday let mortgage? How do they compare to other types of mortgages?
It’s pretty much the same. You’ve got the interest rate, product fees, legal charges. There is holiday let licensing in some areas – every local authority runs it differently. So once you know the main cost of a mortgage, you should then look at the local authority website for the area you’re looking at.
In holiday parks etc there can be ground rents, service charges and maintenance fees. If you know where you’re buying, just do research into the local area to make sure you don’t get any nasty surprises after you buy the property.
Can I get a holiday let mortgage if I already have a residential mortgage?
Having a residential mortgage is a positive thing. A holiday let is, by its very nature, for holidays. So if you don’t already own a property, the risk to a bank is that you might move into the property – and that’s not what this is designed for.
So owning a home is really positive. It also gives you experience – you know how to manage a mortgage. The main thing to think about is affordability. Does your income cover both loans? If it does, great; if it doesn’t, then we need to get a loan assessed based on the rental income you’re likely to get. I’ll break that down in a bit more detail.
Is investing in a holiday let a good idea?
It is when you get it right. It’s a very personal thing. Some people have certain strategies around where they invest and why. With any form of investment, it’s good to stick to what you know.
For example, a guy I know is from Cornwall and he’s bought a number of holiday lets there because he knows it really well. I probably wouldn’t do that because I don’t know the area. So stick to what you know or do some research to be really comfortable with what you’re doing.
Certainly you can’t deny that rental yields are pretty good for holiday lets and the tax treatment tends to be better. These things do change in time. As long as you’re willing to take a little risk it can make sense – and also you get the side benefit that you can use it yourself occasionally as well. It makes a lot of sense to me, but it’s not for everyone.
What distinguishes a holiday let mortgage from a traditional Buy to Let mortgage? What advantages does it offer to investors?
I touched on tax, which I’m not going to go into – please speak to an accountant. These things change in time, but currently the tax treatment is more favourable for holiday lets.
With a standard Buy to Let you normally have a 12-month tenancy and a bank will look at what the monthly rental is. They’ll do some calculations about the rent versus your mortgage and see if it fits or not.
It’s similar with holiday lets, but it’s done differently. A holiday let has a low, medium and high season. Banks therefore calculate the typical rental fees for medium high and low seasons, take an average figure and make an assumption around occupancy. If it’s occupied for 26 weeks of the year, for example, using the mid-range point you look at whether that calculation works with the mortgage.
It’s a bit complicated, but you could take your medium, high, low seasonal figures, work out the average on a weekly basis, take half of that annual income and then multiply it by 12. That’s probably the income that the bank will use for the rental assessment. You tend to find that comes up quite favourably against a Buy to Let mortgage.
The main thing is making sure you’re buying in an area with sufficient demand. If you’re buying in a coastal town, the high season normally is really strong. Further away from the beach, the demand may be lower and perhaps it doesn’t work. If you’re not sure, talk to us and we’ll go through everything in more detail with you.
What distinguishes a holiday let business from other rental property investments in the eyes of lenders?
It’s really the area and the seasonality that’s the main difference. If I’m buying a Buy to Let in Bournemouth, the bank might suspect it’s really a holiday let. But it might be legitimate. Bournemouth is a good example because there’s a university there, there are big employers, so it could be a standard Buy to Let rather than a holiday property.
The main thing is around the seasonality and the demand – make sure those things stack up.
What are the key differences between holiday let mortgages for limited companies and those for individual property owners?
It goes back to my favourite caveat – it’s around tax, so I’m not going to talk about that in detail. The tax treatment is again more favourable through a limited company. That may change in time. There’s probably a bigger conversation about how you manage your property portfolio.
For example, if you’re a higher rate taxpayer, having a limited company is often very favourable – because if you don’t need to draw the income out of the business then you’re not paying any tax. That can be a real advantage.
Speak to an accountant, as they’ll advise you correctly as to whether you should buy it in your name or through a company. It makes no odds to us – we’ll just find you the most appropriate lender, but please do get tax advice.
What tax implications should be taken into account when investing in a holiday let property? How does that differ from traditional rental properties?
The tax is different as we said, but if you have a holiday let in your own name there can be more you can offset. You can also use it personally. There are more grey areas around holiday lets so again, do get tax advice. It’s actually even more complicated than Buy to Let.
What role do specialist commercial finance houses play in lending to holiday let businesses?
Even explaining the assessment is complicated, so it’s often best to work it through with an advisor. The real skill for us is knowing who to talk to and how to present your case.
The big high street banks don’t like holiday let lending because it’s complicated. It’s high touch, it’s high risk. That’s why it’s the preserve of smaller, regional building societies – and some are very strong in this area.
It’s all about finding the right lender for the client, and that can break down to things like area. Some local building societies only lend in certain postcodes, for example. There’s a real granular level of detail that you need and as a broker we know our way around it. But it’s something you need to get right because it is a particularly complicated area.
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How long does the process typically take from application to approval for a holiday let mortgage?
The process itself is the same as any mortgage. The skill is in going to the right bank at the outset to get the right outcome. That’s the difficult bit – and that’s what a broker does. We’ll make sure we get the assessment right and go to the appropriate building society.
If everything goes to plan, it takes two to four weeks to get the mortgage approved, get the survey done and get the mortgage offer issued. They will probably send a surveyor round to get an estimate of those rental figures and run credit checks on you personally. The process is no different, it’s just the assessment that is unique.
What financing options are available for a holiday let business owner?
At the end of the day, a mortgage is a mortgage. You can have it on interest only, repayment or a combination of the two. You can have a fixed or a variable rate and you can fix for the long term or the short term.
The products are a bit more vanilla, so you don’t tend to get things like offset and penalty free options. They do exist, but are less common. The longer term fixed rates work better because of the way they’re assessed – and this type of investment typically is for the long term, so people are usually quite happy to go down that path.
Is it possible to rent out a holiday property using a standard mortgage?
No. Don’t do that because you would be breaching your conditions of the mortgage. That’s actually quite serious. Also, if you rent out a property with a residential mortgage it will invalidate your insurance. So if you rent the property out and the tenants burn the place down, the insurance won’t pay out. That’s the single biggest risk – the mortgage actually is secondary. The insurance risk is the far greater one – so please don’t do it.
Most banks are amenable. They might give you permission, or you could just bite the bullet and change the mortgage, because the risk is far too great if you don’t.
What is the minimum deposit required for a holiday let mortgage?
Typically it’s 25%, because it’s in that investment arena. That does flex in time – when the markets are stronger you can find banks move to 15%, 10% maybe even 5% deposits in exceptional circumstances. But as a rule it’s 25%.
If the market tightens you might need to put down a bit more. The level of deposit is more about sort of the strength or risk of the market at that moment in time. But if you’ve got 25% or more you’re generally in the right place.
Can Airbnb hosts with a mortgage offer their properties for short term rentals?
Yes, absolutely. This has seen a big shift in the last few years for obvious reasons. Initially it was very much frowned upon and some banks wouldn’t do it at all.
Now, if you want to set up an Airbnb we would go with a bank that’s comfortable with that. Some banks – or more likely building societies – still don’t like it. So just talk to your broker, be straight and don’t hide anything because the risks are big if you get this wrong.
How long has Rose Capital specialised in holiday let mortgages? Why might that experience be beneficial to potential investors?
Our company’s been running for seven years and we’ve done this from day one. I’ve personally done this for more than 20 years, and members of my team have 15 or 20 years experience too. We know very well how to put round pegs in round holes and try to save you money.
We look at it in the round – we look at the risks around the insurance and the product etc. The main thing is understanding the assessment and going to the right bank at the outset. Using a broker you should get access to banks that don’t deal with the public – and quite a lot of them don’t, particularly the small building societies.
What options are available for financing a holiday let business, as standard Buy to Let lenders may not be suitable?
All the usual mortgage product options are available – interest only, repayment, fixed, variable etc. Fundamentally it is a Buy to Let mortgage, although the assessment is different. There’s lots of nuance around it but do make sure that it’s an investment that makes financial sense. Let’s get the structure right, so speak to an accountant so we can set things up correctly for you.
How important is it to work with a lender with experience in this area?
It’s absolutely essential. I’m of a vintage now where if I deal with a doctor or solicitor or police officer that’s younger than me I’ll start asking questions. It’s the same with banks. I’m always slightly cautious of new entrants coming into niche areas. It’s a gap, they want to exploit it, but do they know what they’re doing?
We do look at a bank’s track records and how good they are – we explore application to completion rates, for example. Some banks are not good and we avoid them. So this is a classic area where you should stick with somebody who knows what they’re doing. Trying to cut corners or use the wrong lender could make it a really painful experience for you, which you really don’t need.
What is the maximum loan amount I can get for a holiday let mortgage?
There’s no maximum, really. I’ve seen some very big deals down in Cornwall. I’ve got one client who’s actually converting a farm into a type of holiday park. Private banks love this stuff.
A big deal we did a few years ago was for a beautiful house built into the cliffs worth multiple millions. Some big deals do happen but that tends to be for private banks. It’s too big for building societies. People buying those types of properties for themselves or as an investment generally have a pretty good profile, and that’s why private banks and the top end of the high street love it.
We’re central London based and we’ve done mortgages in Belgravia and Knightsbridge etc so comparatively holiday lets are usually less expensive – although anything with a £1 million price tag obviously is big. Don’t let that put you off, because we can absolutely find you a lender for that.
How do holiday let mortgages compare to traditional mortgages?
They are broadly the same, but you will be looking at this in terms of investment. You need to look at what you’re getting in at and what you’re getting out at. Is it just to supplement your income? Are you looking to build a portfolio that you’re selling at a later date? Is it part of a retirement plan? Do you want to buy a few properties to pay the mortgage off and live on the income later?
It depends what your plans are – we’ll then shape the mortgage around that. It’s slightly different from a traditional mortgage. On a property where you live, you want to get the mortgage paid off as soon as possible. That still might be the case with a holiday let, but it may not be the main objective. So we’ll look at this slightly differently.
What’s the process for applying for a holiday let mortgage? What steps are involved?
Once we know what we’re dealing with it’s pretty much the same as any mortgage. We have a solid methodology around how we operate. It’s all on our website if you’re interested.
People tend to come to us through the website or give us a call. We’ll have an initial conversation about what you’re doing and do some initial research. We then send that back to you with a list of documents we will need to get the loan agreed. You send that back to us, we do some further research and get you an agreement in principle.
You can take that to go house hunting, and it proves you’re good for the finance. Once you identify a property to go for, we apply for the mortgage. A very relevant point now is that until we apply for a mortgage we can’t reserve the product. We’re in July 2023 and rates are moving up fairly swiftly at the moment, so do note that we do need to apply for the mortgage to save the product. Once we do apply, that stops the clock.
The application process itself should only retake about two to four weeks, where we cover off the valuation and the legal work. Once a mortgage offer is issued it is valid for six months so you’ve got plenty of time to complete the purchase. Even a solicitor can do their work in that time. Then, the property is yours and you can invest in it, use it at your discretion and have a whale of a time.
Your property may be repossessed if you do not keep up with your mortgage repayments.
Most Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority.