Last week we were contacted by a couple who had been looking for a company specialising in mortgages for Holiday Let properties.
They told us that they were desperate for some commercial/holiday let mortgage advice, but after speaking to a few lenders, were left feeling that what they wanted to achieve, was just not possible.
Their main residence was owned jointly, with an interest only mortgage of £140,000 outstanding. The property consisted of a main house with attached self-contained annexe and a derelict stone barn, all sitting in 20 acres of land.
The couple said that two years ago, they had decided on the idea of applying for planning permission to convert the derelict barn into a Holiday Let property. A local estate agent had, at that time, put the value of the entire property at circa £1M.
They, of course, asked the local planning dept for Full Residential Planning use on the Barn; however, they were told that because they lived in Cornwall and the local infrastructure needed extra protection, a grant of 52 weeks a year Holiday Let use only was the best that could be signed off.
Having taken the advice of the local estate agent, they had gone ahead with the project knowing that the end value of the barn alone should be around £420,000 with their high end specification.
Ultimately, they told us, the income from the barn, circa £28K gross, would form a large part of their pension planning income. Mr was a registered builder and had funded the whole project on a “pay as you go basis” and had built up no additional debts in doing so.
Now, we reached their problem, or shall we say problems!
The Barn conversion project was almost complete and ready for building control sign off. As the couple had only 13 months to run on their mortgage, they had contacted their existing lender about extending the term. The couple told us that, to their surprise, (but not ours), the mortgage lender had said that they were not prepared to offer any variation to the current mortgage terms.
Mrs had asked their lender why it would not consider extending the existing mortgage term. The lender’s mortgage specialist had informed Mrs that it was now not policy to issue residential loans on an interest only basis, at any loan to value, and in any case they would not lend on a property that was part residential and part commercial security, notwithstanding the fact that they already had a mortgage charge on the property.
We confirmed that this was, unfortunately, quite true.
Moreover, we told Mrs that, because her husband, a self-employed builder, had been working on the barn project for 20 months and, consequently, had taken a reduced number of external contracts, the accounts for his business looked quite poor. This would mean that any application to remortgage to another lender using this income alone, would fail the post Mortgage Market Review affordability calculations.
We told them that they would not be the first, or the last, to get caught out by residential mortgage lending criteria. Residential lenders apply very strict affordability rules and do not like “complex” security, as it may affect saleability should the property be taken into possession.
We told the couple that we, as a Holiday Let Mortgage specialist, had a potential solution to their mortgage problem, which had been successfully used in the past.
In other cases, what we have suggested to our clients has involved splitting the barn off the main title deeds to create a new and separate title. This would be done whilst simultaneously re-mortgaging the barn onto an interest only commercial holiday let mortgage, using the funds raised to pay back the existing lender.
We said that, in effect, you would be exchanging a residential loan for a commercial loan, whilst freeing yourselves from the shackles of the strict residential lending criteria imposed following the recent implication of the Mortgage Market Review. Moreover, we said that, as the sum of the many, is worth more than the one, in terms of titles, value would undoubtedly be added.
The couple loved the idea and asked us to get the matter moving as quickly as possible, which we duly did for them.
The case completed successfully last week.