What are the different types of holiday let mortgages?

If you’ve ever dreamed about owning a second home that generates additional income as a holiday let, you’ll need a specific type of mortgage to make it a reality.

Holiday let mortgages have been designed to help people purchase their ideal second property and reap the financial benefits that come with operating a holiday let business.

Here, we take a look at why you need a holiday let mortgage and the different types of loans available.

What is a holiday let mortgage?

Holiday let mortgages are designed for properties that will be used as rented accommodation for tourists, visitors and holidaymakers.

They differ from standard domestic mortgages and buy-to-let mortgages because holiday let properties tend to be rented out on a short-term basis.

For a property to be classed as a holiday let instead of a buy-to-let, it needs to be available for at least 210 days within a calendar year and be rented out for at least 105 of those days.

It must also be advertised as furnished accommodation.

However, HMRC rules mean you can claim tax relief on mortgage interest because holiday lets are classed as a business. This means all expenses from your rental income can be deducted before you are assessed for tax.

You should seek independent tax advice before proceeding to ensure you understand the implications.

There is no ‘assured shorthold tenancy’ on holiday let properties, and the rental income can’t be calculated using standard criteria.

Holiday lets can often be rented out for more money when compared with traditional rental properties, which allows owners to generate a more significant income if they can let it out regularly.

However, you should do your research carefully as it’s not a guarantee.

Although holiday let mortgages are considered a specialist type of lending, several lenders offer them.

The key to finding the right one is working with a specialist holiday let mortgage broker like House & Holiday Home Mortgages, who can help you navigate the market, find the best deal and support your application.

The different types of holiday let mortgages

Like mortgages on domestic properties, there are several different types of holiday let mortgages to choose from. The best deal will depend on your personal circumstances, the type of property you are looking to buy and how much you are looking to borrow.

In terms of how much you may be able to borrow, the lender will carry out an affordability assessment based on your circumstances, such as income and employment status. They will also look at the type of property you’re looking to buy and its earning potential.

The amount of deposit you need to save will also be a factor. Many holiday let mortgages are available up to 75% loan to value, meaning you will need a deposit of at least 25% of the purchase price to proceed.

A specialist holiday let mortgage broker will be able to advise you on the different types of mortgages available, find the best deal and help you navigate the application process, which is more complex than applying for a standard mortgage.

The different types of holiday let mortgage available include:

Fixed-rate holiday let mortgages

A fixed-rate holiday let mortgage guarantees the rate of interest you’ll pay on the mortgage for a set period, which is usually ‘fixed’ between two and five years.

Once the fixed rate period is over, the mortgage will roll over onto the lender’s Standard Variable Rate (SVR), which is usually more expensive than the rate the mortgage was fixed at initially. At that stage, we’ll be back in touch to arrange a new mortgage product.

Also, because the rate is fixed on this type of mortgage, the borrower won’t benefit from any falls in the interest rate, should they occur during the fixed-rate period.

Variable-rate holiday let mortgages

With a variable-rate mortgage, the rate the borrower pays is based on the lender’s SVR, which can go up or down depending on what the Bank of England does with its own Base Rate of Interest.

Variable rate mortgages are usually the type of mortgage a fixed-rate mortgage defaults to once the ‘fixed’ period expires.

Discounted holiday let mortgages

This type of holiday let mortgage sees its interest rate discounted by a fixed percentage below the lender’s SVR.

However, it will move in line with the SVR. So, like a variable-rate mortgage, if the rate goes up or down, so will the monthly repayments.

The discount rate period is usually for a fixed amount of time – again, anything from two to five years – and once it expires, the borrower will automatically default onto the lender’s SVR.

Let us help you buy your dream holiday let property

The holiday let mortgage landscape is a niche area that requires specialist expert knowledge to navigate.

Our expert team has more than 40 years’ experience in the holiday let market and is dedicated to taking the stress away from getting the right mortgage.

We’ll provide honest, straightforward advice and guidance on the right way forward and help you arrange the deal that’s right for you to make your investment a holiday let property as pain-free as possible.

For more information, get in touch today.