Holiday Let Mortgages

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Holiday Let Mortgages – What to consider

Setting up a holiday let business can be a profitable way to generate an income. You need a specific type of mortgage for holiday let properties, so read on to understand how holiday let mortgages work and what you need to consider.

Can I buy a holiday let with a normal mortgage?

All holiday lets need a special type of mortgage, even if you plan to live there yourself for some of the year.

Letting your home would be a breach of your standard residential mortgage contract. Because lenders believe letting your home to the public is more risky than living in it yourself, you need a special mortgage product.

There are two kinds of holiday let mortgage, one allows you to live in the property most of the time and let it for a couple of weeks a year, while the other suits a holiday home that you let to clients most of the time.
Just like with standard mortgages, you can choose the type of deal: fixed rate, variable rate, flexible etc.

Can I use a Buy to Let mortgage for a holiday let?

Buy to Let mortgages are not appropriate for buying a holiday home, as a Buy to Let property is rented out on an ‘assured shorthold tenancy’. This is a long-term agreement, as opposed to a short-term holiday let for a few nights or a week or two.

While there are many Buy to Let lenders, you won’t find so many offering holiday let mortgages. This is largely because not all lenders will accept the fluctuation in rental income. While you should make a good income in high season, your property may be less popular – and therefore less frequently booked – in winter.

Because of this, holiday let mortgages usually have higher interest rates and fees than Buy to Let products.

Could I get an interest-only holiday let mortgage?

Yes, you can take a holiday let mortgage on an interest-only basis. An interest-only holiday let mortgage lets you make a larger profit from your lettings. It only requires you to pay your mortgage interest each month, so the repayments cost less.

When the mortgage term ends, however, you must repay the loan in full. As part of the application process, the lender will request evidence of how you plan to get the money to repay the debt – this might be through investments, sale of the property or other financial plans.

What if I already have a mortgage on my home?

If you currently have a residential mortgage on the property you’re planning to let, you will need to switch your mortgage to a holiday let product.

Many mortgages have an early repayment charge, especially during a fixed rate term. As this can add up to a large sum, it could be worth waiting until the end of your deal before making the change.

If you already have a mortgage on another home and want to buy a holiday let separately, the lender will look carefully at your income and commitments to be certain that you can afford the second mortgage.

How much deposit do I need for a holiday let?

You will need a bigger deposit for a holiday let mortgage than for a standard mortgage. Most lenders limit borrowing to 75% LTV (Loan to Value), so they require at least a 25% deposit.

How much can I borrow with a holiday let mortgage?

To let your property for a few weeks a year, you’ll need a residential mortgage with a special short term letting allowance. The maximum loan amount is calculated based on affordability – your income and outgoings.

With a full holiday let mortgage, lenders calculate the borrowing limit based on the potential income from the property, confirmed by a lettings agency. Lenders use high, medium and low season rates and take varying averages of the number of weeks at each rate to assess their projected rental income for affordability purposes.

Every mortgage provider has their own lending criteria, and may require you to meet minimum income requirements. The type of property is also relevant.

Holiday lets and tax

There are tax advantages to furnished holiday lets as opposed to traditional Buy to Let. To qualify, your holiday let property must be furnished, available for letting for 210 days a year, and actually let for at least 105 days.

Bear in mind that if you sell the property you may be liable for Capital Gains Tax. It is always recommended to speak to a tax adviser prior to starting a business or buying holiday let properties.

How can Yellow Brick Mortgages help?

As a team of expert whole-of-market first charge mortgage brokers, we’re here 24/7 to help you explore how you could run a holiday let business.

We will get to know you and your plans and seek out cost-effective mortgages to suit you. We’ll help you with the mortgage application and link you up with other experts to set up your business. We’re appointed representatives of The Openwork partnership, a trading style of Openwork who are authorised by the FCA and we are listed on the Financial Services Register.

Your property may be repossessed if you do not keep up with your mortgage repayments. The Financial Conduct Authority does not regulate some Buy to Let Mortgages.

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