Holiday Let Mortgage
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Holiday Let Mortgage
Published 08/07/2022
How do holiday let mortgages work?
A holiday let is fundamentally a Buy to Let property – you rent it out for the majority of the time. You might use it a bit yourself, but your fundamental purpose of buying the house or flat is to rent it to make money.
That’s a big dividing line. If you’re thinking of buying a second property to use yourself and not rent it out, that’s what we’d call a second home. There’s a more relevant page and podcast elsewhere on our website for that.
A holiday let is not your primary residence and therefore the mortgage assessment is completely different. The rules and the lenders are different. With a second home, you would have an FCA-regulated mortgage because it’s your residence.
Holiday lets are appealing because they can give you up to 30% better yield than a comparable Buy to Let.
How difficult is it to get a holiday let mortgage?
It’s much easier than it used to be. A few years ago holiday lets were very niche with just a few lenders. Pricing was high and the criteria was challenging, but because of the growing demand, it’s now much easier to get these mortgages.
What lenders are looking for is the ‘rentability’ of a property. Using Airbnb and not having people in the property regularly is a typical Holiday Let scenario. There’s a dividing line around longer term tenants in a holiday let – over a certain length of time that will trip into a Buy to Let, in which case, see our Buy to Let page.
What’s the difference between a holiday let and a Buy to Let property?
Holiday lets generally describe a situation where you’re letting your property to a person or family for up to 31 days. It’s a Buy to Let if they stay more than 31 days. On Buy to Let, you’re typically going to be signing something called an assured shorthold tenancy.
Lots of letting agents have short lets now where they deal with contracts for or one to three months or three to six months. But under 31 days is standard for a holiday let.
Do you need a licence for a holiday let?
Every local authority around the country has slightly different rules. It’s a good idea to research the requirements for your area. It’s fairly easy to find it on the local authority website.
Other than that the only national rule is that if you have a TV in the holiday let, you need a hotel and mobile unit tv licence.
What are the lending criteria for a holiday let?
Every lender is different, and the criteria varies massively. But to give you general rules, typically you need a 25% deposit and there is a minimum age of 21. You will often need to meet a minimum income requirement of £25,000 to £40,000. There may also be a maximum number of properties you own.
Most banks allow you to have personal use of the property for up to 90 days a year. Again, that’s different from a Buy to Let – which you cannot use personally at all.
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How much can I borrow on a holiday let mortgage?
Borrowing is largely driven by two factors. One is your personal income and the other is the income that the property makes.
If you’re a high earner and your income covers both this mortgage and any other mortgages you have, then the holiday let mortgage can be signed off on your income alone. Private banks love holiday lets, especially in high demand areas like Cornwall where property values are often over £1 million.
In a more average situation it’s far more like a traditional Buy to Let, where the lender will be focused on the Interest Cover Ratio (ICR). Unlike Buy to Let, which is relatively straightforward, the holiday let loan calculation is complex. Lenders look at the contract value and do a calculation.
With holiday lets you typically have high, medium and low seasons. The rental income will vary depending on the time of year. A lot of lenders will look at the average income over the course of the year and presume that the property is rented for 30 weeks out of the 52.
Here’s an example. A bank might assess that you can rent a property for £1,000 a week over 30 weeks in a year. So they would base the mortgage amount on an income of £30,000 per annum. You may well receive more, but that’s just the assessment.
Now the ICR comes in. Banks ignore the rate that you’re charged on the mortgage, as it could change. They assume a rate of say 5.5% to cover interest rates rising (which is very topical right now). They take that total and multiply it by 145% to cover things like tax, maintenance, void periods etc.
To put some figures to this, if the assessment was £30,000 a year income, that could support a loan of roughly £350,000. Applying the 5.5% interest, that’s £19,750 and multiplying that by 145% takes you to around £28,000 give or take. It’s complicated, so what I would recommend you do is just talk to us. It’s a lot easier.
Are holiday let mortgages more expensive?
Anything that’s not your main residence will be a bit more expensive because the risk is that if things go wrong, you’re more likely to sell the property. So banks will always charge a slightly higher interest rate on anything other than the prime residence.
But because so many lenders are coming into this sector, costs are comparable to a Buy to Let. You might find that the rates are between 0.5% or 1% higher.
The fees also tend to be a little bit higher. A lot of lenders charge fixed fees of £2,000 or 0.5% or even a 1% fee.
How do I apply for a holiday let mortgage?
In terms of applying, talk to us. There are lots of considerations to make, including stamp duty – you might have to pay an extra 3% charge for example. You will need to pay council tax and all sorts of running costs. So it’s not just the mortgage itself.
I always recommend that before you come to us, talk to an accountant. If you’re a couple where only one of you is working, you might want to put the Holiday Let in the second person’s name or nominate the income to them for tax reasons.
How we apply is the same for every mortgage. We will look at bank statements, proof of income via payslips or accounts. We need to have a good picture of your overall situation. Your residential mortgage will come into play, as will any Buy to Let property you own. We will make it as easy as possible.
We’ll help you deal with the estate agent, solicitors and the bank. Once we’ve got the ball rolling we will then do the heavy lifting.
Do talk to a broker. I’ve barely scratched the surface of the things you need to talk about on a holiday let and it’s so dependent upon your situation: what bank you use, even where the property is. A lot of banks don’t deal with the public, they only deal with brokers.
We’re part of the biggest network in the UK and we get a lot of exclusive rates and preferential treatment. You will get a better outcome going through a broker than if you try and do it yourself. We’ll also save you a lot of time. Let us deal with that so you can focus on the day-to-day.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
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What's the difference between a holiday let and a Buy to Let mortgage?
The dividing line is 31 days. A holiday let typically describes letting your property to a person or family for up to 31 days at a time, after which a stay tips over into Buy to Let territory and usually requires an assured shorthold tenancy. The mortgage assessment is different too: holiday lets are assessed on seasonal rental projections with assumed occupancy across the year, while Buy to Let runs off a fixed monthly rent figure
How many days a year can I use my holiday let myself?
Up to 90 days a year with most lenders. Personal use is one of the features that distinguishes a holiday let from a standard Buy to Let, where you can't normally use the property at all. Within the 90-day cap, the lender will still expect the property to be genuinely available for short-term letting the rest of the time, because that's what the affordability assessment is built around.
Do I need a minimum personal income to get a holiday let mortgage?
Yes, in most cases. Holiday let lenders typically require a minimum personal income of £25,000 to £40,000, alongside the standard 25% deposit and a minimum applicant age of 21. Some lenders also cap the total number of properties you can own. Higher personal income makes the case stronger and can shift the assessment so that affordability is signed off on your income alone rather than relying on the projected rent
How do lenders work out the rental income on a holiday let with seasonal demand?
Lenders take an average rent across high, medium and low seasons and assume the property is let for around 30 weeks of the 52. As a worked example, £1,000 per week over 30 weeks gives an assumed annual rent of £30,000. The lender then applies a stressed interest rate (often around 5.5%) and an Interest Cover Ratio of 145% to that figure, which on £30,000 of rent supports roughly £350,000 of borrowing . The actual rent you receive may be higher, but that's the affordability figure the lender works to.
Is a holiday let mortgage the same as a second home mortgage?
No, they're different products. A second home mortgage covers a property you intend to use personally and not let out, and because it's classed as a residence, it's regulated by the FCA in the same way as a residential mortgage. A holiday let, by contrast, is fundamentally a Buy to Let product designed for letting income, with personal use restricted to around 90 days a year and a different (and unregulated) underwriting approach
Does Heron Financial arrange holiday let mortgages, including for higher-value properties?
Yes. Heron Financial works regularly on holiday let cases, from straightforward purchases assessed on the rental ICR to higher-value properties in high-demand areas like Cornwall, where private banks are often the right route on properties over £1 million. The team is part of the largest UK broker network, which gives access to lenders, exclusive rates and underwriters that don't deal with the public direct. The initial conversation is no-obligation.