The type of mortgage needed to finance a holiday home is dependent on several key factors.
The term Holiday homes covers a 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.
Usage of the term is quite loose and frequently interchangeable amongst individuals and lenders alike.
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.
There is currently only one mortgage lender that fulfils category 2. However, there are some conditions. Letting to holidaymakers is restricted to a maximum of 18 weeks. This is offered by the lender on the basis that letting is very much a secondary use. The lender offers this facility using their standard residential interest rates, so 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
In the case of holiday let mortgages, categories 3 and 4, for holiday homes, the conditions are very different. 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”. There is a required level personal income to qualify for the loan in the first place and is not related to the loan size and which must be from trade or profession. 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 2 let.
Any income form holiday letting is taxable. It is well worth checking the HMRC’s Furnished Holiday Lettings guidelines. Taxation is different to buy to let and arguably much more generous.
In summary
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.