The exponential rise of Airbnb and similar sites is encouraging landlords to diversify into holiday lets, as the returns can be considerably higher than buy to let. But how do you finance these properties, and will your existing BTL lender allow you to switch income model? Here are the answers to the questions we get asked most frequently.
Airbnb, Holiday Lettings, Home Away, Owners Direct, I could go on. The number of holiday accommodation sites is big business, with operators promising property owners higher returns than standard buy to lets. Add to this the less favourable income tax environment and stricter borrowing rules for buy to let landlords, and it’s no wonder that we are seeing an increasing number of investors get in touch to discuss getting the finance to move into this sector.
But just how easy is it to get a holiday let mortgage?
1. What is the difference between a holiday let mortgage and a buy to let mortgage?
The difference lies in the tenancy agreements for the property. Whereas buy to let properties are usually let for a minimum of six months, holiday lets are typically let for much shorter periods - sometimes only one night! As holiday properties have a much higher turnover of ‘tenants’, this risk must be accounted for in the mortgage, hence lenders offer separate mortgages for holiday let properties.
2. Who can borrow to purchase a holiday let property?
- SPV (special purpose vehicle) companies
- Individuals
- Trading Ltd companies
- Partnerships
- Trust
3. Will I need to remortgage to turn my buy to let into a holiday let?
Probably! Most buy to let mortgage contracts require properties to be let on Assured Shorthold Tenancy (AST) agreements. ASTs typically are fixed terms of between six months to three years, which means that lets for shorter periods are not permitted. However, there are now lenders on the market who will work from business projections for the holiday let, which opens up a new avenue for some landlords.
4. How will the lender know if I switch my property from a buy to let into a holiday let?
If a holiday-maker can find your property online, then so can your lender! When applying for a buy to let mortgage, lenders will always check to see if the property is listed on Airbnb and similar sites, particularly if the property is in a tourist area.
If you already have finance in place and decide to switch from buy to let to holiday let, the lender may not check but this doesn’t mean you won’t be found out. We’ve helped several landlords who have been in this situation…
Airbnbs can attract a rowdy crowd - stag parties, hen dos and the like. We have previously helped a landlord remortgage because his buy to let lender discovered he was doing short term holiday lets. The neighbours had complained to the council about the noise and the council subsequently notified the lender. As a result, the lender asked the landlord to repay the loan. More seriously, the lender would have also been within their rights to add the landlord onto the Hunter fraud prevention list. Fortunately, this didn’t happen and we were able to find a quick solution for the customer, but this could have had serious financial consequences for the landlord.
5. Which lenders offer holiday let mortgages?
Some buy to let lenders provide specific mortgage products for holiday lets, others lend under a broader commercial mortgage remit. Although borrowers can go directly to a few lenders, to get access to the entire holiday let mortgage market you will need to use a specialist broker. If you want to ensure you get the best deal for your specific circumstances, we strongly recommend using a mortgage broker.
6. How many lenders offer holiday let mortgages?
Currently, there are over seventeen active lenders in the holiday let mortgage market. Of these:
- Around 11 lenders will lend to portfolio landlords, i.e. landlords with four or more distinct mortgaged buy to let properties
- 11 lenders will lend to limited companies
7. What prices are holiday let mortgages for personal borrowers?
Rates start from c.99% for 2-year fixed rates and five-year fixed rates start from c.3.24%. Most lenders will take their debt serviceability calculations based on AST rental income rather than projected holiday letting income. However, as mentioned above, there are now a few in the market who will use projections.
8. What prices are holiday let mortgage rates for borrowers using Ltd companies?
If you are using an SPV, two-year fixed rates start from c.3.24% and five-year fixes from c.3.39%. Personal guarantees will be required from directors. You will most likely have to cover the lender’s legal costs and some lenders will also take a debenture over the company. Whether you’re borrowing personally or through a company, all lenders will offer interest-only terms. Expect for the arrangement fee to cost up to 1.5% -2%, most of which can be added to the loan. Find out more information on setting up an SPV Limited Company to purchase property.
9. Which mortgage lender is best for holiday lets?
In our opinion, no one lender stands out from the crowd. Most will assess debt serviceability based on AST rental income, rather than the projected holiday let income. Many will require the borrower to earn an income of between £10,000 and £25,000 per year; others may need £40,000 per year.
Whether or not you are a portfolio landlord, lenders will take into account your borrowing across your entire portfolio, including your home mortgage commitments. They will also closely examine your personal expenditure, cross-referencing tax returns and rental bank statements!
10. Where can I get a larger loan for a holiday let?
If you are looking to borrow a larger amount, it may be worth using a limited company. Do take specialist tax advice first though! Lots of our clients own properties in a limited company, particularly those who are High Net Worth individuals and don’t need to draw a wage from the company. They often prefer to pay corporation tax on the profits of the company, rather than paying tax at 40% to 50% on rental profits! And of course, they are building up funds in the company to use as a deposit towards another holiday let.
As part of our whole of market lender access, we have a commercial lender that takes a pragmatic approach to these deals. They can lend to landlords with four or more mortgaged rental properties and to limited companies. These lenders have an in-depth understanding of the nuances of the market. They can lend between 60% and 75% loan to value, with repayment mortgage terms of 15 to 25 years. Some will even offer interest-only facilities.
Their arrangement fees can be negotiated and they will accept projected holiday letting income over standard AST rental income. Their rates are circa 3.59% for a discounted rate and by gosh, they really know their market place. They will also consider lending where an owner-occupier lives in the main house and the business has holiday lettings attached.
11. What are other tax benefits of owning a holiday let vs buy to let Investment?
Unlike buy to let properties, holiday let properties are not subject to Section 24. This means that you can still deduct a number of costs from your taxable income including utility bills, mortgage interest, letting agency fees, maintenance costs and insurance. These deductions are no longer available for standard buy to let properties and you can now only deduct 20% of a properties mortgage interest.
Everyone’s circumstances are different, so if you want to know whether a holiday let or buy to let is more tax-efficient for you, you should speak to a professional tax advisor. We can help by drawing up projected mortgage costs for either scenario so you can compare.
12. What other type of costs are involved with owning a holiday let property?
It’s fair to say that there are a number of additional costs associated with holiday lets compared to buy to let properties. Advertising, holiday let agencies, cleaning and maintenance are the main additional costs you’ll need to consider besides the mortgage. It’s a good idea to do lots of research on these so you can work out a rough profit margin, as this may impact the type of property you purchase and where.
13. Is it a good idea to consider a holiday let that would need to be refurbished?
In principle, there’s nothing wrong with taking on a property that needs work before it can go on the holiday let market. However, depending on its condition, you may not be able to get a holiday let mortgage on it straight away if lender’s do not consider it rentable. A solution to this would be to purchase the property using bridging finance, do the necessary work and then re-finance onto a holiday let mortgage. If you’d like more information on this process, do get in touch on 0345 345 6788, and we can talk you through it!
14. How is a holiday let mortgage calculated?
The majority of holiday let mortgage lenders calculate affordability based on a standard AST rent (the same as a normal buy to let). Doing so minimises risk as, should you not be able to get enough short-term holiday let business and put it on the market as a normal buy to let, the income should still cover the mortgage costs.
If you’re looking to borrow more, some lenders will base calculations on the properties projected holiday let income averaged over c30 weeks per year, which is typically higher than AST income. Lots of investors prefer this, as it allows you to borrow more on the mortgage; however, only a few specialist lenders are comfortable doing this. We’d recommend using a broker to access these lenders!
You can search the latest buy to let mortgage rates using our BTL calculator here.
Why use a Holiday Let Mortgage Broker?
We are a market-leading brokerage for holiday lets and we continue to champion the holiday let mortgage sector. We pride ourselves as the go-to brokerage in the UK.Remember, MFB has access to all of the holiday let lenders, so if any of the above points ring true and you would like us to help, pick up the phone and call us on 0345 345 6788.
