Holiday-Let Mortgages Explained

What are Holiday Let mortgages?

Holiday-let mortgages are a special type of mortgage for people who want to buy a property and only use it at certain times of the year. You might want to use it yourself for a few months and then let it out for a few weeks when you’re not using it, or you may be looking to rent it out as a short-term let to holidaymakers. If this is the case, then you’ll need a holiday-let mortgage.

How are holiday-let mortgages different from standard mortgages or Buy to Let?

Holiday Let mortgages are similar to standard mortgages, but with a few main differences. The main difference being that you’re not usually allowed to use a standard residential mortgage as a Holiday Let that you rent out. Buy-to-let mortgages have different rules too. 

Buy-to-let mortgages are more like a business transaction, so lenders require the property to be rented to tenants on a longer term basis, rather than a short-term holiday rental.

The type of mortgage you’ll need all depends on how the property will be used. If you’re planning on buying a home that you’ll use exclusively for your holidays or for friends and family free of charge then it can be straightforward. You’ll likely qualify for a residential second home mortgage. But there will be restrictions on how much time you can spend there, who can and can’t stay, and the loan to value lenders will consider.

If you’re planning on letting out your holiday home regularly to get some extra income, then you’ll either need a holiday-let mortgage or you’ll have to request special permission from your mortgage lender to get a residential mortgage. Both can be done, but they need the right approach, with a well put-together application. It’s best to work with a specialist mortgage broker who can help you do this.

What’s the criteria for getting a Holiday Let mortgage?

Holiday Let mortgages have their own lending rules. And each lender has their own individual criteria that will be used to assess your application. Here’s what you’ll usually need when applying for a holiday-let mortgage:

• You’ll typically need a deposit of at least 30% of the property’s value, but some lenders may require 40%.

• You’ll usually need to be earning at least £20,000 up to £40,000 on top of any rental income you’re planning on making.

• Your estimated income from rent should typically be 125% to 145% of the interest you pay on the mortgage.

• Most lenders will also require you to already be a homeowner.

• A good credit history is preferred.

What deposit do I need for a Holiday Let mortgage?

The size of the deposit you’ll need to put down will depend on your individual circumstances and which lender you go to. But remember, the more money you put down as your deposit, the more of the property you’ll own right away, and the smaller your mortgage will be.

Lenders have their own criteria to work out how much of a risk it would be to lend money to you and usually ask for a bigger deposit for Holiday Let mortgages than a standard residential mortgage. About 25-40% of the property’s value is pretty normal. This is usually higher than a standard buy-to-let mortgage because lenders feel there's more risk with short-term lets due to their seasonal nature.

Lenders will also want to know if you’ve got any other rental properties. They’ll want to see how good you’ve been at keeping up with your repayments. If you can show you’ve never missed a payment, you’ll be considered a lower risk.

What income do I need for a Holiday Let mortgage?

As with all mortgages, lenders want to make sure you can afford the monthly repayments and keep paying them even if your circumstances change. To check this, lenders will always look at your income - as well as other spending habits and commitments such as  mortgages, loans, or debts.

Your personal income is also important to lenders when working out your affordability. You’re usually required to have an income of at least £20,000 to £30,000 a year. This is to cover you in case the money you make from the rent doesn’t cover your mortgage payments. If you need to pay for your Holiday Let mortgage using your personal income it’s called ‘top-slicing’ and is more common with buy-to-let mortgages.

As part of your application, you’ll need to show the lender how much you expect to make from rent. The minimum you’ll need to be accepted is at least 125% of the annual interest on the mortgage. So for a mortgage payment of £300 a month, you’ll need to be able to make £375 in rent. 

Lenders want to make sure you can pay the mortgage even if you’ve not got any paying guests for a while. If you’ve got savings or can show that you’ll have enough spare income to pay the mortgage if the property is empty, you’re far more likely to get your mortgage approved.

How much can I borrow for a Holiday home if I don’t rent it out?

If you’re planning on using your holiday home exclusively for yourself and your family/ friends for free, then your mortgage affordability is calculated differently. You’ll be suitable for a second home mortgage rather than a holiday-let mortgage and your affordability will be based on the size of your deposit, your credit history, personal income and outgoings - just like a regular mortgage. 

Bear in mind that during your affordability check lenders may ask more detailed questions to understand why you want to take out another mortgage and to decide if you can really afford to pay for it. Make sure you have these answers prepared!

The amount you can borrow will be at least four times your annual salary. But sometimes lenders will let you borrow up to five or six times your earnings. It all depends on your unique situation.

What’s the minimum age for a Holiday Let mortgage?

Typically, 21 is the minimum age for getting a holiday-let mortgage. But every lender varies and has different criteria to decide if they’re willing to give you a mortgage or not. 

Interest-only mortgages for Holiday Lets

Whether or not you’re offered an interest-only mortgage will depend on your individual circumstances. Lenders will want to know if you intend to use the property exclusively yourself as a holiday home or if you plan on letting it out for a number of weeks a year.

I’m going to let the property out

If you’re letting the property and intend to use a holiday-let mortgage, lenders will nearly always consider doing this on an interest-only basis. You won’t be paying down the mortgage, but your monthly repayments will be a lot lower. At the end of your mortgage term you’ll still have the entire loan to pay back, but you’ll have the option to sell the property to cover this.

I’m not going  to let the property

If you’re going to use the property as your holiday home exclusively and intend to use a regular second home mortgage then lenders will want to see a clear repayment plan. This could include selling the property, or using your investments or savings to pay it off.

Every lender is different, that’s why it’s a good idea to work with a specialist mortgage broker who knows the holiday-let mortgage market well.

How to get the most out of your Holiday Let 

If you’re lucky enough to be looking at Holiday Let properties, here’s how to get the most out of your purchase: 

• Location, location, location. A good location might sound like a no-brainer, but did you know that where your holiday home is can affect whether or not you get approved for a mortgage? Do your research! How many visitors does the area get each year? What’s the weather like? Are there any amenities nearby? 

• Know your rivals. Don’t forget to suss out the competition! Is there enough demand for another holiday rental where you’re looking to buy? Is it near enough to where you live full-time so you can keep on top of maintenance and make improvements?

• Extra features. Hot tubs, swimming pools, sea views and an open fire - sound like heaven. These features are often in high demand from holidaymakers and can help your Holiday Let stand out from the crowd.

• Furnishings. You’ll also need to furnish your property, so when applying for a mortgage make sure you keep some cash in the bank to get it kitted out. As a furnished Holiday Let owner you may also benefit from certain tax breaks, but it’s best to speak to your Accountant or a Tax Advisor about these.