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Holiday Let Mortgage Criteria – What You Need To Know
Holiday let mortgages are very different to other types of mortgage, including buy to let, and each has their own separate lending rules that need satisfying. Making yourself familiar with the holiday let mortgage criteria will help you to understand the selection process for both the mortgage and the property.
We have tried to summarise some of the main points below but please be aware that each lender has their own set of mortgage criteria that will be used to assess your holiday let application.
The borrowers
The majority of lenders prefer UK residents over 21 who are in stable employment or self-employment with a provable income (payslips, accounts, bank statements etc).
The main income should come from a trade or profession and not rental or investment income.
Borrowers should have minimum provable income of £20,000-£40,000 per annum.
However, we can also source holiday let mortgages for expats and applicants who cannot meet the minimum income requirements.
Mortgages to buy a holiday home property or business are available to:
- Individuals
- Partnerships
- Trusts
- Trading Limited Companies
- SPV Companies
Most lenders require a borrower to be an owner occupier, however we now have 4 or 5 available that will accept applicants in rented accommodation. In addition, we have several lenders that will accept borrowers that are non-owning partners/spouses. Service personnel in married quarters are acceptable.
The property
The property should be in good, habitable condition, located in the UK and meet the security lending requirements of the mortgage company. Most lenders are looking for single dwellings with standard construction and these will be freehold/long leasehold.
The good news is that we have huge experience in financing multi-unit holiday lets, conversions and also those with non-standard construction that do not meet the criteria for the mainstream lenders.
Part of the mortgage application process also involves obtaining a rental projection from a local holiday letting agent. It is best to seek their advice before committing to buy a property as this will help to determine the financial viability and rental opportunity for the property.
Some properties will be restricted in how they may be used and this will affect the holiday rental mortgage options available to you. We can obtain holiday let mortgages for most circumstances including Section 106 restrictions. Again, it is very important to find this information out before you apply for a mortgage.
Loan to value (LTV)
The loan to value is the maximum percentage of the property purchase price/valuation that the lender is willing to offer you. Most lenders in the holiday let market have a maximum of 60-75% but 80% is a possibility.
This LTV is also subject to your own personal circumstances.
Deposits
As you can see from the example above, the cash deposit needed will normally be a minimum of 25% or 20% if you can borrow from a local lender.
If the borrower owns other properties it may be possible to purchase the property by spreading the holiday let mortgage over several properties and therefore financing the deposit if it is not possible to provide this as cash.
Gifted deposits from close family can be acceptable, please advise us as early as possible if this is the case.
Loan sizes
Minimum £40,000
Maximum £1.5m
Loan term
Minimum 5 years
Maximum 40 years
Rental income and income cover ratio
A holiday let property is a business and the mortgage lenders need to see that the potential holiday letting rental income can cover the mortgage payments plus an additional margin.
Interest rates have risen in recent times, and lenders have reacted accordingly.
75%-80% LTV is more difficult to achieve, as current interest rates used for rental cover (affordability) mean that for a given amount of rent, a max loan would be smaller than it would have been 12 months ago.
Most lenders now look for 145% coverage at 7%, which is a high bar indeed.
This calculation, along with the Loan To Value (LTV), will determine the maximum mortgage for this particular holiday let. You will see that the rental income plays a crucial part in the affordability calculation. Maximising this by choosing the right property in the right location will make your application much stronger.
As holiday letting is seasonal, the lender will use 30 weeks rental income using an average of the weekly high season, medium season and low season as declared by the letting agent.
However, these increased costs will be partially passed on to holidaymakers, but the agents updated projections lag behind rate rises.
If we are presented with a case that can’t pass a lenders stress test, but the applicant and property are suitable, it’s possible to “top slice” available personal income to make the case fit. A very useful tool in the current marketplace.
Property usage
One big advantage of owning a holiday let property is that you can use it yourself!
Now while you are not allowed to permanently live in the property you are able to spend time there each year. So that the property qualifies as a Furnished Holiday Let with the associated tax advantages, certain criteria needs to be met each year. We have a section that explains Holiday Let Tax that you may find helpful and we always recommend you seek advice from an accountant who is familiar with these rules.
A holiday rental mortgage only allows the property to be used by holidaymakers with some degree of private use. Should you later to decide to either live in the property or switch to a standard buy to let, the lenders permission will be required. We suggest you speak with us for some guidance should this be needed.
Our experience
We have been advising clients on holiday let finance since 2006 and our brokers have the widest possible knowledge and experience. We can assist with all types of enquiries as long as the property is in the UK.
Whilst many of the mainstream lenders have strict criteria for their mortgages there are others who are more flexible and understanding. We have long standing relationships with these lenders and this allows us to discuss our clients situation with an experienced (human) underwriter should this be needed. So a case that, on paper at least, does not seem to work can be packaged and accepted by an alternative lender with our support.
