How Does A Holiday Let Mortgage Work

Categories: holiday lets | guides | buy to let mortgage guides

The holiday let sector has always been popular. AirBNB was influential in getting investors to think differently about the opportunities short term lets offered; tax changes in the rental market have fuelled landlords to look at it ever more closely; and when the Covid-19 pandemic hit and more people holidayed at home, demand was boosted and remained high.

If you have your sights set on a holiday let, it pays to know about holiday let mortgages,and that’s what we’ll cover in this guide.

Keep reading to learn more and get answers to questions such as:

Are holiday let mortgages popular?

In 2023, the Valuation Office Agency for the UK government stated that there are approximately 85,000 self-catering holiday properties in England and Wales. Not all of these have holiday let mortgages, but many of them do.

Mortgages for holiday lets give property investors the chance to get their hands on any sort of standard construction residence (i.e. not a log cabin or caravan), from a picturesque house in the woods to a cottage by the sea, to rent out to tourists. Many investors can’t afford to buy these properties outright, and so these mortgages provide them with a viable alternative.

Is there a difference between a buy to let and a holiday let mortgage?

There are a few differences between mortgages for holiday lets and mortgages for buy to lets, but the process of acquiring them is very similar.

Both mortgages are based on the loan-to-value (LTV), which denotes how much the lender will lend, compared to the total value of the property. For most lenders, this number is up to 75% (some may go to 80%), which means the lender will cover as much as 75% of the market value, with the borrower paying the other 25%.

These mortgages are also calculated against the projected rental income, and this is one of the areas where they differ. Buy to let mortgages are usually rented for a minimum of 6 months while holiday lets are typically used for stays of less than 31 days. A holiday let must also meet strict occupancy criteria:

  • Contain adequate furniture
  • Be available for at least 210 days a year
  • Be rented commercially for at least 105 days a year
  • Lettings of more than 31 days must not exceed 155 days in total over the year

Do you need a holiday let mortgage broker?

A specialist mortgage broker can be a valuable resource. They can answer any questions that you have about holiday let mortgages (both for traditional and short term/AirBnB lets), ensure your desired property is eligible, and help you to find the best deal. This is especially important for first time holiday let landlords and those dealing with complex cases.

What are the lending criteria for a holiday let mortgage?

The criteria varies by provider, but borrowers will typically be asked to meet certain income, property, and affordability requirements, including:

  • Personal situation: Not everyone can apply for a holiday let. Most lenders limit applications to existing homeowners aged at least 21, but broker will give you a definitive picture – there are a few lenders who will help if you are not a homeowner or age 21 years.
  • Minimum income: As with residential mortgages, some lenders may ask that you meet an income threshold, others will not. Mortgage payments are expected to be covered by the rent, which is a more important factor than your personal income. However, you will need to cover mortgage costs even if you have a gap in rental income.
  • Rental income: As with buy to let mortgages, the lender will require the rental income to exceed the mortgage payment by a given percentage. This is called the 'rental coverage'. A “stress test” will also be applied to make sure you can keep making payments if the interest rates rise. These two factors are used in a calculation to assess whether the mortgage would be affordable to you, if it was more expensive. This is to protect you from overstretching yourself financially.
  • Property condition: The lender will seek to ensure the property is a sound and secure investment and that there is nothing that could hurt its value, such as covenants or easements.
  • Maximum LTV: While the LTV can be as high as 80%, that doesn’t apply across the board and many lenders do not go above 75%.

If you fall outside the criteria above, or are a close but not exact fit, Commercial Trust advisors can tell you whether you can get a holiday let mortgage. Call, live chat or enquire online to find out.

What are the rates for a holiday let mortgage?

As with other mortgage types, the interest and monthly payments will depend on the value of the property, the LTV, the lender, and whether it is an interest-only or repayment mortgage.

Use our calculator to look up today’s holiday let mortgage rates.

Stamp duty must also be paid on holiday let purchases.

It is more difficult to get a holiday let mortgage as a first-time buyer, but not impossible. Where the property is not your first, the holiday home will be subject to an additional stamp duty charge of 3%, along with the standard stamp duty rates.

There are exemptions, but only for properties worth less than £40,000, as well as caravans, houseboats, and motorhomes, but these last three types of accommodation are not accepted by lenders for holiday let mortgages.

Can I buy a holiday let through a limited company?

Yes, it is possible to purchase a holiday let through a limited company and you can also build a portfolio of investments.

Whether or not you should invest through a limited company is something you should discuss with a financial advisor and /or tax accountant, as they can provide you with a list of pros and cons.

A specialist mortgage broker can help you find a suitable mortgage, once you have chosen your investment route.

What should you consider when getting a mortgage for a holiday let?

If you have decided that holiday let mortgages are the right way forward, there are a few things to keep in mind:

  • Income and availability: Holiday lets don’t provide guaranteed income. Just because you can get a mortgage, it doesn’t mean it’ll be a profitable venture. Check the value and rental income against local occupancy rates.
  • The LTV: The lower the LTV, the more of the house you will own and typically the less you will pay every month.
  • Furnishings and fees: Furniture, amenities, insurance, and maintenance fees all cost money, so make sure you consider all of these when calculating profitability. Some are classed as expenses and may reduce your tax payments. Consult a tax expert to learn more.
  • Affordability: The affordability checks are usually stricter on second homes. Holiday let mortgages aren’t the same as residential mortgages, but your income and credit can still be checked, so make sure they are in good standing.
  • Learn the occupancy rules: Make sure you know the rules regarding occupancy and classification. For instance, you must actually make the home available as a holiday let and can’t simply use it as a second home for you and your family.

Speak to a specialist at Commercial Trust

Whether you’re struggling to get a mortgage or just need a little advice, the experts at Commercial Trust can help. It doesn’t matter if it’s your first rental property or your 100th, our advisors will help you. Check our case study on holiday lets with complex issues to see some of the work we have done in the past.

FAQs about mortgages for holiday lets

To qualify as a holiday let, each letting should be for no more than 31 days. There are exceptions e.g. if your holidaymakers fall ill, or have a delayed flight, so have to extend their stay for those or similar reasons. However, you must not try and pass off a long-term rental property as a holiday let.

The amount you can borrow is expressed as a percentage of the property value. The maximum offered by UK holiday let lenders is 80% of the value, so you can borrow this amount or less and would need at least 20% of your own money as a deposit.

If you have a stable income, an existing home, and the funds to pay a deposit of at least 20%, the process can be relatively simple. A broker can make the process far easier, by chatting through your needs and circumstances. They will be able tell you quickly if they think you can get a holiday let mortgage, and if yes, they can then go and find you the most suitable deal possible.