Before committing to buy a holiday let property it is important to consider all of the finances first. Possibly one of the most important is how much deposit do you need?
Deposits for holiday lets
In order to get a holiday let mortgage, you will need to provide at least a 25% deposit.
The reason that the deposit required for holiday let is slightly larger than some buy to let mortgages, is that lenders view the risk associated with short term letting as higher than buy to let (BTL). This is due to the seasonality of the rental income stream. BTL is seen as being more predictable for the two main reasons that it is a larger market and secondly because rental contracts (Assured Shorthold Tenancy) are usually 6 months so there is an income stream. You could argue that the predictability of BTL is not that good and the reality in BTL can be very different.
Given that there is no AST in the case of a holiday let mortgage, a level of income, either a projection or existing, must be demonstrated in a format prescribed by that lender. This is irrespective of whether you are trying to achieve the maximum loan size advertised loan to value (LTV) by that lender or at a much lower LTV.
Holiday let Rental Income, buy to let and max LTV
It is important to differentiate between lenders who offer mortgages that allow holiday let in their terms conditions but strangely use potential AST rental income for their loan size calculation and those who genuinely will use the holiday letting income for the calculation.
Unfortunately, some of the lenders in the former category offer great interest rates and so are very attractive, but the consequence of using the AST income for calculation leads to lower permissible loan sizes than are normally requested by purchasers. This in turn means that the deposit needs to be higher.
This of course often presents a problem, as generally property in areas of the country that are desirable holiday destinations, and thus produce a good return as holiday lets, are not areas where there is great demand for longer term tenants. Thus the BTL demand is less and AST rents are less. The reverse is also generally true.
The exceptions to the above are lenders who normally use BTL income but if the property is an existing holiday let with provable income, will use those figures. However, they will need to be confirmed by reference to accounts or actual rental statements.
The holiday let lending market is not new and the lenders who have been in it for a while are comfortable with it and assess income from a holiday let in a more expected way. The applicant is required to approach a letting agent with a specific property in mind and request a projection. This projection must state the anticipated income for the low, medium and high season week and include a total gross income figure. At the time of writing, the lenders that offer standard products, take an average of the low, medium and high season weeks, multiply by 30, then apply an income coverage ratio (which is a safety margin calculation) of the monthly mortgage payment requiring to be covered by 145% using a stressed mortgage interest rate of 5.5%. One lender will use 5% if a 5 year fixed rate product is chosen, which has a consequence of giving a slightly larger maximum loan for the same rent.
Although standard holiday let products are advertised at just 25% deposit, it is advisable to use the services of an experienced mortgage broker who understands the implications of the lenders varying approaches. If a property is non-standard or more complex a more commercial product may be required, a broker will be an essential part of the transaction.
Author: Mark Lanario