The type of mortgage needed to finance a holiday home is dependent on several key factors concerning how it will be used. Here we will explain the main points to consider.
The term holiday home typically covers these four main uses:
- Second homes for personal use only
- Second homes that are occasionally let out to holidaymakers
- Investment properties to be let as holiday homes only
- Investment properties that are predominantly let to holidaymakers but with some use by the owners
Second homes for personal use only
Most lenders that offer mortgages for second homes, category 1 above, offer them on the basis that the property is for the exclusive use of the borrower, family and some family friends.
Such mortgages are normally offered using standard residential interest rate products and are thus usually the cheapest interest rates out of any type of mortgages. But it should be noted that the property is not to be let on a commercial basis; so holiday letting, short term letting and Airbnb letting is specifically excluded in the mortgage conditions. If such a property is let in these ways, this is a breach of those conditions and the lender is well within their rights to cancel the mortgage and demand repayment of the loan, pretty much immediately.
Second homes that are occasionally let out to holidaymakers
There are a limited number of lenders that are happy to lend for these situations.
However, there are some conditions to be aware of. Letting to holidaymakers is restricted to a maximum of 18 weeks. This is offered by lenders on the basis that letting is very much a secondary use. Lenders offers this facility using their standard residential interest rates, so it is again amongst the cheapest ways to achieve holiday letting.
The view they take is that if you want to let for more than 18 weeks then you should use an appropriate product, which could easily be with their stable of products, but which will be priced accordingly. The affordability test for these loans reflects the lenders view on a secondary use and so is based on the borrower’s personal income, earned from trade or profession and not in any way from income produced by restricted holiday letting. The affordability also takes account existing residential mortgage and outgoings
Investment properties used for holiday letting
Categories 3 and 4 have very different mortgage conditions and both will need a holiday let mortgage (rather than a holiday home mortgage). This is due to the property being predominantly let out during the year.
Generally, letting is unrestricted and the borrowers are allowed some use of the property as a holiday home, however this must not become an “occupation”.
As for mortgage criteria, there is a required level of earned personal income to qualify for the loan in the first place and this is not related to the loan size. Whereas the majority of lenders determine the allowable loan size based on a level of income provided from holiday letting, there are one or two notable lenders who only accept income into their affordability calculator, at the level that the property would produce if it were used as a buy to let.
Any income form holiday letting is taxable. It is well worth checking the HMRC’s Furnished Holiday Lettings guidelines. Holiday let taxation is different to buy to let and arguably much more generous.
The terms second home, holiday home and holiday let investment property are used frequently but without regard to the distinctions that exist in lenders minds. So, to save wasting time or to avoid breaking mortgage conditions, always enlist the services of a good broker to clarify the situation on how the property may or may not be used along with the associated finance.
Author: Mark Lanario