Holiday Mortgage Types – Episode 2

Holiday Mortgage Types

Second home mortgage options for you and your family to use for holidays

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Mortgage Types: Holiday Let vs Holiday Home

In this episode, Mark Stallard, Director and Adviser at House and Holiday Home Mortgages is joined by Co-Director and Business Partner, Joe Stallard to discuss the differences between a Holiday Let and Holiday Home Mortgage.

Can you get a mortgage on a holiday let or a holiday home?

Both are very mortgageable, but it’s important to understand the difference between the two.
A holiday home is primarily a second residence for someone – the classic example is a person living in London, with a second home in the countryside or at the coast. A holiday let is more of an investment: its primary purpose is to be let out the majority of the time, although you can use it a little yourself too.

Each type of mortgage is assessed in different ways. In effect, a holiday home will have a residential mortgage while a holiday let requires a commercial mortgage.

What do I need for a holiday let mortgage?

A holiday let mortgage is usually assessed on some basic criteria: that you’re already a homeowner and you have an income outside of property. You have good credit and a 25% deposit to put down. How much you can borrow is determined by the rental potential of that property.

What do I need for a holiday home mortgage?

A holiday home mortgage is driven by your income and credit commitments. It’s much more in line with standard residential products. However, the running costs and any existing mortgage on your first residential property will be taken into account in calculating a borrowing figure for the second home.

Why is it so important to get the right type of mortgage?

Not getting the right type of mortgage for the property could ultimately mean you are committing a form of mortgage fraud. This has its own repercussions and the lender can demand their money back. Suddenly you might need to refinance your home – and the fraud will be on your credit record.

As a Mortgage Broker we will always work with you to get the right mortgage product on it from day one.

What is the difference between a Holiday Let mortgage and a standard Buy to Let mortgage?

Holiday let mortgages are viewed similarly in how they’re assessed and designed. But there are some key differences – especially in that the lenders are different. There’s little overlap between the mortgage companies offering the two types of product.

The way they determine what you can borrow is also very different. Buy to Let is simple in its calculations. You have the same tenant paying a standard rent for six or 12 months at a time.

Meanwhile with a holiday let you charge very different rates in the peak of summer versus the colder and darker months of the year. A lender will take this rent variability into account. Broadly speaking, they’ll average out the figures and assume occupancy for around 30 weeks of the year.

How much deposit will I need?

For a holiday let, the majority of lenders offer a 75% mortgage with 25% deposit. If you can get up to 35% or 40% deposit, you’re going to get much better rates.

For a holiday home it’s different, starting at around a 15% deposit. But again, if you can reach a higher deposit you will improve your interest rate. You might also open up access to certain products with additional features.

For example, some lenders offer second home mortgage products with a certain letting allowance built in. You might be able to let the home out for around 3-4 months of the year even though it’s a holiday home mortgage.

Are holiday let mortgages more expensive?

At the moment we are seeing residential mortgages at an interest rate of less than 2%, Buy to Let mortgages of 2-3% and holiday let mortgages at 3-4%. A lot of customers wonder why it’s so expensive.

But perhaps we need a different mindset. Holiday lets are a commercial entity and you stand to make a good profit on them if things go well. In addition, they are priced that way because it is a riskier venture for a lender. With a holiday let, there are lots of different people coming in and out of the property which increases the potential for damage.

There are also some tax benefits with these properties, so it’s important to get good property tax advice.

How does a holiday let mortgage work?

There are a few requirements for a holiday let mortgage:

1. Already owning/occupying a property.

2. Having a separate income to cover any gaps in rentals – usually £20,000 minimum

3. Clean credit files.

4. 25% minimum deposit.

The amount you can borrow is led by a rental forecast on a property that you’re interested in, which you can get from a local holiday letting agent. It’s usually free of charge.

If this looks good to a lender then it’s just a question of application and the usual property buying journey from that point on.

What should I look out for with a potential holiday let property?

There are a few pitfalls to avoid, and the first is around properties with occupancy or usage restrictions on them.

Properties on a holiday park, for example, may have a restriction that they can only be used as a holiday let. Even though we’re talking about holiday let mortgages, the majority of lenders don’t like this kind of restriction. If they had to repossess the property, they want it to be as easy to sell as possible.

Secondly, construction type can be challenging. Timber framed, steel framed or thatched properties can be a bit tricky to borrow against, so make sure you’re clear about the construction methods and check with a broker before making an offer.

Can I buy anywhere in the UK?

Some lenders are focused on traditional UK holiday locations: Lake District, Cornwall, coastal areas etc. rather than city destinations, although some lenders are starting to get better at lending on short-stay properties.

Do I need to set up a limited company?

It’s increasingly common to set up a limited company for Buy to Let and a growing number of lenders are now getting into limited company holiday lets. But at this point there is a smaller market for limited company mortgages than somebody buying in their own name.

Setting up a limited company is often done for tax reasons, especially if people are building property portfolios. This is an area where you will need specific tax advice.

How can a Mortgage Adviser help?

The first way we can help is in really understanding your personal circumstances so that we can identify the most appropriate lenders. We will talk to you about your property plan to make sure that you get the right type of finance from day one.

Brokers are here to try and make the journey as simple as possible. We can save you approaching 30 lenders to compare their mortgage products and criteria. Plus, everyone’s situation is slightly different; there are always unique elements to address. We can often achieve things that would be difficult for a direct customer because of the relationships we hold with the lenders.

Most importantly, we’re on your side – we advise you carefully and work with you to achieve your property goal.