Anyone who has sought out a mortgage knows how important it is for the borrower and the property they are buying to fall into a set of criteria that the lender has defined. The holiday let market is smaller than the occupancy or buy-to-let markets, and there are fewer lenders offering holiday home mortgages. This means meeting the criteria of one of these lenders is even more important in the holiday let market than elsewhere.
Here, we’ve listed a few of the most common criteria, and explained how they might affect you.
Your own income
Lenders are very concerned with your ability to pay them back, of course. Mortgagees are ‘secured’ with the property itself, but repossession is a complicated and expensive process, and no lender wants to take much of a risk of having you fail to meet your side of the deal. As a result, holiday let mortgage lenders may not even be willing to consider you unless your yearly income is more than £10,000, £20,000 or even £40,000, depending on the lender.
This can be complicated by whether you are applying as a soul or joint applicant. One lender might require an income of £20,000 for a sole applicant, but joint applicants’ combined incomes might be acceptable at £30,000.
If you are employed, you’ll generally need to provide your salary and tax information. If you are self-employed or own a business, you’ll often have to provide 3 years’ worth of accounts.
Many lenders will allow the mortgage to include up to 4 names, but few will consider more than 2 of those names for the affordability test.
Lenders on the holiday let market will also expect to see proof that the property can be rented profitably relative to the cost of the mortgage. They might need to see proof that the gross rental income for the property has historically been as much as 150% of the cost of the mortgage for which you are applying. They will apply what is called a ‘stress test’ for this, assuming an interest rate of around 5.5%, regardless of the actual rate you’ll be paying at first.
A reputable letting agent can typically give you a reliable estimate of what a property could be expected to profit you. In fact, many lenders will only consider proof of rental income that comes from a professional letting agent. That is why it can be very important to use an agent rather than a service like Airbnb.
The value of the property
As a mortgage is a secured loan, the property must be sufficiently valuable to cover the repayment if you cannot. As such, it is rare to find a holiday let lender willing to offer a mortgage in a property worth less than £50,000 – but as always, there can be exceptions.
Lenders will want to inspect the title deeds of the intended property to make sure there are no easements or covenants which could interfere with its profitable use, or which could reduce its sale value. They will be especially careful to spot any clauses which prevents the property from being used as a holiday rental.
Holiday let and buy-to-let portfolio maximums
Some mortgage lenders have strict limits to how many buy-to-let and holiday let properties you have in your portfolio. Many will not lend to you if you already have 10 such properties, and a few will only lend to you if you do not already have any holiday let properties to your name. Others, of course, are more flexible.
Your own situation
Typically, holiday let lenders will only offer you a mortgage if you are over 21 years old and already own one home.
How much deposit you have available
Even the minimum deposits for primary dwellings are on their way up at the moment, but they are higher for holiday homes. Expect most holiday let mortgage lenders to require a deposit of between 25% and 30%.
LTV (loan to value) amounts
Each lender has a maximum LTV they will be winning to offer a mortgage on. This is similar – and closely related to – the deposit question. If their maximum LTV is 70%, then realistically, the deposit requirement is 30%.
Loan size minimum and maximum
Holiday let mortgage lenders often have strict limits as to how much – and how little – they will loan as a mortgage. This varies quite a bit from lender to lender, but the minimum is rarely below around £30,000 and the maximum as rarely much more than £750,000. Some lenders also have lower LTV maximums at the higher end of their loan size limit. For example, a lender might offer as much as 75% LTV for a £400,000 mortgage, but only 65% at £700,000.
Under UK law, you cannot live in a holiday home full time. Therefore, if you are getting a mortgage as a holiday home., lenders will also insist that you do not attempt to live there full time. Failure to abide by these restrictions could jeopardise your mortgage agreement.