Craig takes a look at specialist mortgages, and how these might be suitable for holiday lets.
When might I need a specialist mortgage?
A specialist mortgage applies when you’re in a situation that sits outside the normal criteria of a traditional mortgage. A specialist mortgage might be the answer in various scenarios.
Examples might be where you’re buying a high value home; or you want to set up a second charge mortgage on an existing property to pay for renovations.
They could also suit people who are Self-Employed looking for a holiday home, or a Buy to Let property – or generally anyone who doesn’t meet the standard criteria for a mortgage.
How do I get a mortgage for a Holiday Let property?
Generally a lender for a holiday let mortgage will look at your current, regular income alongside the loan-to-value. They won’t necessarily include the income you expect from letting out the property.
This is to ensure you can afford the mortgage payments during times when rents are not coming in, or when you are using the property yourself.
While staying in the property yourself is one of the advantages of a holiday let, you cannot live there on a permanent basis – this is part of the terms of your mortgage.
Every lender has their own criteria, but generally you will need to be over the age of 21 and in stable employment. Your main income should not come from another rental or investment property. Borrowers will need to prove their income exceeds a certain amount annually, and that varies from lender to lender.
How much can I borrow for a Holiday Let?
There is usually a minimum deposit for a holiday let mortgage, often 25% of the property value. Rental projections from a holiday agent may also be required, covering off peak seasonal periods and high demand times of the year.
The rental property itself must meet certain criteria, for example, being located within the UK and functioning as a single family dwelling.
Some specialist mortgage products for holiday lets offer a maximum loan-to-value (LTV). If your holiday let cost, for example, £200,000 and the LTV from the specialist product is 70%, then you’ll be able to get a loan of £140,000 from your lender and your deposit will need to be £60,000.
Is it better to buy a Holiday Let or a standard Buy to Let?
You might think there is a little difference between a holiday let mortgage and a Buy to Let mortgage, but in fact they are quite distinct.
A Buy to Let mortgage will contain different conditions and requirements. For example, you will need to have an assured shorthold tenancy (AST) in place. Using a Buy to Let property as a holiday letting without informing your lender is a breach of the agreement and could undermine your mortgage contract and credit rating.
Another key difference between the two types of mortgages is how the loan size is calculated and the estimated rent from the properties you will receive.
Will I earn more from a Holiday Let or a Buy to Let?
There are many things to consider in making a decision about letting a home. Holiday lets tend to bring in less rental income overall due to their seasonal nature. Meanwhile, furnished holiday lets come with tax advantages that Buy to Let properties do not.
Holiday lets are treated as a business, which means you can claim capital gains tax relief on any profits. Owners can also claim capital allowances to cover the cost of furnishings, furniture and equipment such as refrigerators and washing machines.
There are also more allowable expenses for a holiday let compared to a Buy to Let, including letting agent fees, accountants, certain legal fees, mortgage interest, building and contents, insurance, maintenance and repairs, utility bills, council tax, ground rental and service charges.
This is a complex area, so speak to a Financial Adviser to work out the best situation for you, and explore your mortgage options. We’ll be able to find the right lender to suit your specific circumstances.