With more people opting for holiday homes over hotels for their trips in 2022, more real estate investors are now assessing how they can capitalise on this trend. Buying properties in coastal area hotspots such as Devon and Cornwall is fast becoming one of the best ways to earn a strong return on investment. People are buying properties for their self-use and renting them out as holiday lets for the rest of the year. These properties provide a good income stream and offer tax advantages if you ensure that the property is operated like a furnished holiday let, as defined by HMRC.
If you plan to buy a holiday let or a holiday home, you need to make sure you tap into the right financing options depending on your requirement. There are primarily two ways you can finance your property.
Different ways to finance a holiday let property
• Mortgage the property itself: There can be two types of mortgages here depending on the way you use your property
• Second-home mortgages: This type of mortgage is for a property exclusively used by you as your own holiday home. These mortgages are straightforward residential second home mortgages.
• Holiday let mortgages: This mortgage is for a property to be used as a holiday let. It’s typically only available via specialist lenders such as building societies.
• Mortgage your primary residence: You can also choose to refinance your residence if there has been an uplift in value. Alternatively, you can take a second loan on your primary residence via specialist lenders such as Selina Finance. The cash freed up on your primary home could be used to finance the holiday-let property.
Still, the most widely used option to finance holiday lets are holiday-let mortgages. These are special buy-to-let mortgages for buying a property that will be let only for certain periods of the year on a short term basis, rather than on an ongoing basis. Because of the seasonal nature of the income, not many lenders are able to estimate the rental income, resulting in a perception of it being a higher risk than standard buy-to-let mortgages. These holiday-let mortgages can be offered on either an interest-only or a repayment basis.
Holiday-let mortgage lending criteria
Given the higher risk perception of these properties, the lending criteria are much stricter. The lender will want to make sure you can afford the monthly payments and will need to know you will be able to pay them throughout the year even if subjected to a range of circumstances. As in any mortgage, the lender will want to see your income and spending commitments including other mortgages and loans and finances.
When assessing the income of the property, some lenders will consider the income from the holiday-let property whereas others may limit their income consideration to only what potentially the property could earn as a standard buy-to-let. They may also assess that if the property remains unoccupied, you must be financially able to pay your mortgage.
For most holiday-let mortgages you will need to meet the following criteria;
• Down Payment: A deposit of at least 25%-30% and at times it may even go as high as 40%.
• Income to Interest ratio: A rental income of at least 125% of the interest payable on the mortgage. This may go as high as 170% for some specialist lenders.
• Personal Income: Besides rent, there will be an expectation that your personal income besides the rental income is at a minimum of between £20,000 and £40,000.
• Personal situation: Lenders will usually require that you already own your own home and are 21 years of age or older to be accepted for a furnished holiday let mortgage.
• Minimum and maximum mortgage amounts: Most lenders will not go to offer a mortgage on a property that is worth more than GBP 1 million
As the criteria changes frequently for holiday let mortgages and with every investor’s situation being different, it is best to speak with a good mortgage broker who specialises in holiday let and second home mortgages. There are two types of broker, ‘whole market’ and ‘tied’ and both offer different services. Tied brokers work by recommending a small number of lenders, but might be able to offer deals and perks as they have better relationships with their specified lenders. Whole market brokers tend to be independent and impartial and cover all lenders, giving you a range of options. Your personal circumstances will determine which type of broker is needed.
- The information contained in the above article is accurate at the time of writing, based on our research in the UK. Rules, criteria and regulations change all the time and so speak to one of our experts to confirm whether the information is up to date. Nothing in this article constitutes financial advice.
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