There is lots of useful information in our article and case study sections. Built up over many years we share new developments in lending attitude and also client case studies for the more difficult holiday lets!
You have probably already given quite a bit of thought to the property type and location, but will your idea of the perfect location and property type fit the lending rules set by mortgage providers active in the holiday let market?
At the time of writing, we are aware of 21 different lenders that are active in the holiday lettings market. Each one has specific lending rules that cover what is and what is not acceptable security in terms of holiday let property type, condition and location.
In this article, we aim to give you some guidance on how lenders assess the suitability of security property.
This may of course affect your decision on what and where to purchase.
As a potential holiday let property buyer, you will need to decide what to buy and where. The property size, number of bedrooms, charm, age, condition, location is all in the mix.
A lender’s assessment of the property is about security. They set the rules on acceptable property types and locations because they want to know that if you do not keep up the repayments, the property can be sold to repay the loan. This is termed “suitable security” by the mortgage industry.
Of course, each lender will have a different attitude to risk and the property saleability, which may well affect other areas of lending criteria, such as loan to value (LTV) and personal underwriting.
We thought it might be helpful to give you some information about property types and locations and how they are viewed by lenders in terms of suitability.
Some of property issues that we are going to cover may not be a total bar to lending, however they could reduce the number of holiday let lenders willing to lend in the first place, or increase the interest rate the lender will charge.
The main areas that we will cover are:
🔘 Property condition
🔘 Nearby commercial businesses
🔘 Occupancy restrictions
🔘 Non-standard/non-traditional construction
🔘 Leasehold issues
🔘 Holiday complexes/parks
Most lenders in the holiday let market require the security property to be fit for holiday letting on the day of legal completion.
To finance a purchase using a holiday let mortgage, the property should be in good habitable condition, have electricity/gas supply, a functional kitchen and bathroom.
In short, it should be somewhere that people would pay to stay.
There are a couple of lenders that have slightly more flexible criteria in this area, allowing some upgrading of the property to be undertaken before letting, thereby saving £££££ on the cost of expensive bridging finance. These lenders don’t advertise this flexibility at all, but a good specialist in mortgages for holiday lets should be able to help.
What a holiday let mortgage lender absolutely won’t lend against is a property that needs development work, even if you have the financial resources to support the loan whilst the work is done. This is viewed by a lender as high risk and there is the possibility that something could go wrong leaving them with a property that has works that are incomplete, not up to standard or appropriate permissions not in place, should they need to repossess.
There are lenders that will lend against such development projects, but it would need a two-stage finance plan. Firstly, bridging finance for the development stage and then remortgage onto a holiday let mortgage. We have considerable experience in this type of project, so please call us to discuss your ideas.
Nearby commercial businesses
This is an issue that lenders take very seriously because the proximity and type of commercial activities can affect not only the “quiet enjoyment” of the property, but also a lender’s selling position.
A mortgage lender, as we have already mentioned, is concerned about getting its money back if the borrower defaults on payment.
Examples of commercial activities that potentially present a problem to lenders include properties that are near: pubs, restaurants & take aways, pet shops, hairdressers, petrol stations.
If you look at the list above, each type of commercial business has the potential to affect the quiet enjoyment of the property occupants. If we consider a flat above a takeaway restaurant, most lenders’ criteria state that this type of security is unacceptable.
Some will accept security on a property, above or near a commercial premises. To mitigate their risk, in terms of reduced saleability, they usually accept such properties at lower LTVs and/or charge a slight premium on the rate.
These are often overlooked until quite late in the buying process, leading to a rejected mortgage application, much anguish and, of course, abortive costs, such as legal and valuation fees.
They are overlooked because:
🔘 most buyers have never heard of them or believe that a property with a holiday let usage restriction is a perfect match for a holiday let mortgage, which is understandable.
🔘 estate agents and vendors are unaware or do not make it clear that the property has restricted usage, not understanding that it may well affect a lender’s decision to lend.
The truth is that 95% of lenders that offer holiday let mortgage products state in their mortgage criteria, that the property must have full residential use in the planning. In other words, it must be a normal house that could be lived in as your main home but is to be used as a holiday let.
The reason once again comes down to saleability in the event of borrower default and repossession. A property that has full residential use in the planning, has far greater appeal to potential buyers if a mortgage lender takes possession in the event of default.
What properties have occupancy/usage restrictions?
Properties on holiday complexes will almost always have them because that is the purpose of the complex. Holiday let usage restrictions on properties located on parks and complexes often state that the property can only be used for a maximum of 11 months a year.
We have seen one holiday complex that will allow usage of its holiday properties for only 7 months a year. Trying to obtain finance on a property that only be used for 7 months is very challenging. Indeed, most lenders see this type of restriction as too restrictive, making the security unsuitable.
Outside of holiday complexes, such restrictions are most usually found on buildings that have been converted from agricultural to domestic use. A barn conversion is the perfect example and we see lots of these.
The landowner, usually a farmer, applies to the Local Authority for planning permission to convert a barn to a dwelling. The Local Authority will consider the application but may decide that the local infrastructure could be overwhelmed by too many people living in the locality full time. So, instead of granting full planning permission for a dwelling the Local Authority Planning Dept can grant restricted use planning; holiday let only.
Such properties can produce an excellent yield as the cost/values are less than those purchased with full residential use and used as holiday lets.
Whilst financing such properties is not straightforward, a good mortgage broker who knows the right questions to ask and where to go, can obtain a mortgage for you on a restricted use property.
The definition of what constitutes non-standard construction varies from lender to lender. It might also be referred to as non-traditional construction
The most widely accepted form of construction by mortgage lenders is brick or stone, with a tiled or slate roof – traditional/standard construction.
Timber framed construction with brick or blockwork, although acceptable to most lenders, can be deemed unacceptable security if the timber framing type is defective.
A Tudor period house, which has stood for 600 years is, of course, timber-framed and very solid. Some lenders however, regard this as non-standard.
There was a period in the mid to late 70s where a membrane was used incorrectly, causing damp problems. Lender’s valuers are usually aware of areas where such properties are located.
Concrete construction houses are another problem area. They come in many different types that all have their own potential defects. Steel framed, timber framed, pre-cast and cast in situ are some of the build methods used; however, there are many different trade names. There are some regional problems with concrete construction, but one stands out above all others in the market for holiday homes – Mundic – a Cornish problem.
Mundic concrete contains metalliferous aggregate, the spoil of mining operations. Unfortunately, these aggregates are prone to deterioration over time and can cause complete failure of the concrete. There are, however, different grades of Mundic and only an expert can determine exactly what is in the material. It is the type and extent of Mundic present in the building that determines if the property is mortgageable, or not. If you are buying in Cornwall, do not be surprised if the lender’s valuer requests a Mundic report. It is a very common requirement.
There are many other build types, including timber holiday lodges, that are determined by lenders as non-standard or non-traditional construction and the best way to ensure that your mortgage application is sent to the right lender is to discuss the build type with a mortgage broker. Mortgage brokers deal with issues like this daily.
The remaining term on a lease is of interest to any mortgage lender. The reason is that as a lease approaches expiry, the value of the security property will gradually decrease. Lenders, as we have discussed, are looking to protect their money interest in the event of default.
In the case of holiday let mortgage lending, most loans are set up on an interest only basis, so the debt remains the same. A lender’s interest will not be improving with a falling property value, combined with a loan that is not decreasing.
To protect their interests, most lenders active in the holiday let market insist on at lease of 90 years unexpired at the commencement of the loan.
Modern leases can also cause problems for people looking to purchase property that will be used for holiday accommodation.
Notwithstanding, the fact that the lease is perfectly acceptable in terms of its length, there can be an issue present which can bring the whole process to a standstill. The problem is that this issue is usually only discovered late in the buying process, leading to a total abort and large costs. Modern leases, particularly those associated with new build flats, often contain a clause stating the property can only be used for residential occupation. Owner occupied and long term let under such a clause but running a holiday let or AirBnB are classed as business use and would, therefore, breach the terms of the lease.
Such clauses are included to protect the quiet enjoyment of the property for leaseholders who might be affected by the coming and going of guests if the flat was to be used as an AirBnB or holiday let.
Properties on holiday let complexes
This is a specialist area with very few active lenders.
If you are trying to finance an individual property on a holiday complex, you will need to speak to a specialist holiday let mortgage broker like ourselves.
Some of these holiday complexes, or holiday parks as they are also known, can be very appealing, because they usually come with shared facilities such as golf courses, gyms, restaurants, swimming pools etc. The sting in the tail is that such holiday parks levy quite high management charges to owners and there is often a clause in leases, which allows the park to levy “ extraordinary charges” in certain circumstances, such as restaurant refurbishment etc. Lenders are always interested in the maintenance of such parks, in terms of the facilities, because it is the quality of these that attracts the paying holiday makers to the site. If the park owners allow the site to look and feel rundown, who is going to visit?
Buyers can get caught out when applying for holiday let mortgages, believing the property underwriting criteria is the same as that applied to residential mortgages.
In reality it is very different and more closely related to commercial mortgage property underwriting.
This is just a guide where we have tried to cover the most common issues affecting holiday let property underwriting.
If you are looking to purchase a holiday let property, we strongly recommend seeking advice about the points above prior to making an offer to the vendors.