Interested in setting up a holiday let business to boost your income? Getting a mortgage takes a little additional work as you need a special type of mortgage product – we can help you compare the options and launch into holiday letting.
Can I buy a holiday let with a normal mortgage?
A mortgage on a holiday let requires a special type of product, as a standard mortgage won’t allow you to rent out your property. Lenders see holiday lets as more risky than the usual home loan.
You can choose from two types 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.
As with standard mortgages, you can choose from different types of deal: fixed rate, variable rate, flexible.
Can I use a Buy to Let mortgage for a holiday let?
A Buy to Let mortgage would not be suitable for buying a holiday home, as these apply to properties rented out on an ‘assured shorthold tenancy’. These are long-term agreements with a tenant, rather than short-term contracts for people to stay at the property for a few nights.
In general, holiday let mortgages have higher interest rates and fees than mortgages on Buy to Let property. There are also fewer lenders offering these products.
Most mainstream lenders stay away from holiday let mortgages because of the unpredictability of rental income. While most holiday lets make a good profit in high season, outside holiday times your property may be less frequently booked.
Could I get an interest-only holiday let mortgage?
You can choose either a capital repayment mortgage or interest-only for your holiday let. Many people opt for interest-only as it means you make a larger profit. Because you only pay the mortgage interest each month, the repayments are lower.
But at the end of the mortgage term, you must repay the loan in full. When you apply for the mortgage your lender will seek proof of how you will repay the debt, such as through investments or other financial plans.
What if I already have a mortgage on my home?
If you 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. These can reach up to 5% of the mortgage amount, which may be a large sum. Check the details before making a decision – you might choose to wait until the end of your deal before changing.
If you already have a mortgage on a property and want to buy an additional holiday let, lenders will take time to assess your income and commitments to be certain that you can afford the second mortgage.
How much deposit do I need for a holiday let?
Holiday let mortgages require a bigger deposit than standard mortgages. Most lenders limit borrowing to 75% LTV (Loan to Value), so you will need at least a 25% deposit.
How much can I borrow with a holiday let mortgage?
Lenders will calculate your borrowing capacity based on the income that you are likely to get from the property, as confirmed by a holiday lettings company.
Each mortgage provider will have specific lending criteria. Some may require you to meet minimum income requirements and the type of property can also play a role.
If you only plan to let your property for a few weeks a year, you’ll need a residential mortgage with an allowance for short term letting. As per any residential mortgage, the lenders calculate your maximum loan amount based on affordability, by looking at your income and outgoings.
Holiday lets and tax benefits
A furnished holiday let gives you certain tax advantages and benefits. 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.
Renovations and purchases that increase the appeal or price of your holiday let are tax deductible too. You can run your holiday let as a sole trader or set up a limited company – seek advice from an accountant on the pros and cons.
Bear in mind that if you sell the property you may be liable for capital gains tax.
How can One MP help?
As Mortgage Brokers, we’ll help you set up a holiday let business. We will explore your situation and plans to seek out cost-effective mortgages to suit you. We’ll help you with the mortgage application and support you all the way. We’re authorised by the FCA and listed on the Financial Services Register.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH THE REPAYMENTS ON YOUR MORTGAGE.
