As a specialist Broker, we frequently receive questions from potential borrowers, asking about how holiday let mortgages work. The number of questions we receive is growing rapidly, possibly due to Airbnb and short term letting being regularly talked about in the UK national press.
As a specialist in advising on short term mortgages, the list of questions we receive is rather long, however below are 6 that stand out in the minds of our brokers:
- Do I need to have a minimum level of personal income to be eligible?
- Do we need to be owner occupiers?
- Can we have a short-term let mortgage, in addition to our residential mortgage?
- What about affordability?
- What property types are acceptable?
- Can you have more than one holiday let mortgage?
Overall, Holiday Let Mortgages work along similar lines to buy to let (BTL) mortgages, except that they are used to finance properties that will be let to holiday makers and overseas tourists on a short-term basis.
HMRC’s technical term for Holiday Letting is Furnished Holiday Letting (FHL). It is classed by HMRC as a business activity, therefore loans used to finance them are in fact mortgages for business use, also known as commercial mortgages. By contrast BTLs are classed as investment, not a business.
So, let us look at some of the questions we are asked in more detail.
Do I need to have a minimum level of personal income to be eligible?
There is often a minimum income qualification requirement to be eligible. For example, at time of writing Leeds Building Society and Precise Mortgages set their minimum income requirement at £40,000 pa. For some other lenders whose criteria is different, this figure can be as low as £20k. The further caveat is that this must be from trade or profession. It must not come from rental or other investment income. In all cases there is usually a common-sense check in that the mortgage applicants should be able to service any background debt without using rental income.
Do we need to be owner occupiers?
No. Most lenders require borrowers to be owner occupiers at application and completion of the loan. However, currently there is one lender who requires the borrower to have merely been an owner occupier at any time in the 12 months preceding application. There is a further 10% of the market who do not require a borrower to be an owner occupier at all and being a current landlord is the qualifying requirement. In addition there is one lender that will lend to first time buyers (FTB). If you are an FTB we suggest you contact a mortgage broker as the lender will want to know how you can or want to own an FHL without owning the roof over your head. Cases have existed where such mortgages have been used for owner occupation and not the FHL use; this would be mortgage fraud.
Can we have a short term let mortgage, in addition to our residential mortgage?
Yes. If you already have a residential mortgage, in most cases the holiday let loan stands alone. So, providing that an applicant and the FHL property meet the other status criteria, the loan should be approved. In rare cases, if an applicant has a residential mortgage which appears to be unaffordable e.g their personal income does not seem enough to cover the mortgage, it can cause a mortgage underwriter to ask a lot more questions.
What about affordability?
Apart from the personal income qualification, affordability of the new loan is based on the projected income. Please, bear in mind that lenders will apply safety margins to these figures. Each lender has a different way of working this out and some will accept projected holiday let rental income for start-up holiday let business, others will not. This is a complicated area and we recommend that you to contact an experienced mortgage broker for advice.
What property types are acceptable?
Providers of mortgages for short term and holiday lets are a little more fussy than residential lenders. Eco-type construction is not welcome, as are most concrete construction types. Some of the larger more substantial wooden construction buildings, that are not on a park site, may be acceptable. Quirky properties e.g. windmills can be acceptable, but there are limits. So, a converted chapel, would normally be acceptable, as resale should be quite easy. However, a converted railway station, which still looks like one, would probably send an underwriter running for cover; ease of resale for the lender would be the issue. Traditional construction, whether single or multi units, are usually fine.
The property must be capable of being used as a holiday let on the day of mortgage completion. So, refurbishments or sites requiring development do not qualify. Please contact us how such properties should be financed as solutions are available.
Can we have more than one holiday let mortgage?
Yes. Arranging up to 4 mortgages for an applicant to purchase or re-finance holiday lets is quite usual, providing the other normal criteria are met.
If you own 4 or more mortgaged properties, we enter the realm of the portfolio landlord. Portfolio landlord cases are financed by specialist commercial lenders. A commercial lender will want to review several aspects the whole portfolio, not least in terms of rental coverage, whether they are taking 1 mortgage or the whole portfolio.
This article was written to give a rough idea of how holiday let mortgages work. As we receive more queries relating to the growing short-term let market, we will try and keep you posted with more articles.
However, if you would like more in depth information on holiday let mortgages and holiday letting, please download the latest version of our guide.