How do I get a holiday let Mortgage for properties with variable rent?
By resident mortgage expert Mr Payam Azadi
Competition has returned to the holiday let mortgage market with rates as low as 3.29% (5.7% APR)*. It is welcome news for amateur and profession holiday let landlords who have properties across the country in the tourist hotspots.
Traditionally, if the location and advertising is right, these properties yield annually more than the traditional buy-to-lets inland. Statistically it is difficult to separate holiday lets from second homes as it is not uncommon for the landlord to use the premises for their own excursions but in certain areas such as the Lake District properties of this nature are believed to represent as much as 80% of the overall housing stock and this demand cannot be by coincidence; it is almost certainly bolstered by landlords who are achieving excellent rental income returns.
I have personally seen surveyors say the rental on a conventional buy-to-let basis is as much as eight times lower than what can be achieved on a holiday-let basis. Before we run away with ourselves the net figure is closer than that though as the management and advertising costs are greater and need to be accounted for.
So where do you start? Well location is a fundamental in the decision process to purchase a holiday let and much is written about the next best place on the internet. So where is the best place to buy a holiday let? For my own part as well as traditional places such as Dorset, Devon and Cornwall recent trends show a gravitas to Southwold in Suffolk and Whitby in North Yorkshire.
Financing your holiday let with a mortgage
The lenders who are active in the holiday let market tend to be building societies. The big high street banks tend to avoid them as they require an underwriter to appraise the mortgage application which does not fit comfortably with their automated decisioning processes. For example, keying a single rental figure entered into their online systems does not accurately reflect the flow of income throughout the year or demonstrate the level of planning and experience the holiday let landlord possesses.
The mortgage can be raised against equity on existing properties via a remortgage or acquired when purchasing the holiday let. Remortgages tend to allow up to ninety-percent of the property value to be released. New holiday let purchases normally are capped at seventy percent i.e. a minimum of thirty percent deposit. There can of course be a combination of the two methods if savings are tight.
How much income do I need to afford a holiday let mortgage?
The good news is the holiday let mortgage lenders will predominately base affordability on expected rental income surpassing the mortgage payment by at least twenty-five percent and evidence supporting this rental yield via holiday letting agents letters and listings on established holiday websites are helpful.
The lender is also likely to look for a minimum earned income level of at least £20,000 as a cushion to pay for your everyday needs.
Which holiday let mortgage provider has the lowest interest rates?
There are over a dozen active holiday let lenders in the market and each can have over a five products at any given time. Only one holiday mortgage product offers the cheapest interest rate and even then your own personal circumstances might mean you do not qualify for a mortgage on that particular holiday let product. In short, the holiday let mortgage market is dynamic and large so don’t rush in speak to a holiday let mortgage expert, such as Niche Advice, as the wrong choice could turn a profitable venture into a loss.
What is the tax position on holiday let mortgages?
We advise you talk to your Accountant about your own individual circumstances however as a general rule the interest payment on holiday let mortgage lets are usually allowable as a tax deduction for income tax purposes, so if you make £30,000 a year in but the mortgage interest was £20,000, you are only liable for tax on the £10,000. It is also likely that you can benefit from capital allowances for insurances and mortgage set-up costs. There could also be a reduction in capital gains tax and inheritance tax if the property is furnished and let for two thirds of the year.
* Based on a purchase price of £200,000 and an interest only mortgage of £100,000 over 25 years.
For more information on Holiday Let Mortgages please contact us on T: 020 7993 2044 or alternatively complete the simple enquiry form on the top right hand side of this page.
Payam Azadi is a partner at Niche Advice Ltd who are Independent Financial and Mortgage Advisers in London.