Five Holiday Let Mortgage Hurdles

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    Whether you’re getting a residential mortgage, buy-to-let mortgage, or a holiday let mortgage, there’s a fair amount of admin involved. From your initial ‘find a mortgage lender’ Google search, to checking that you are a suitable candidate for the mortgage, to gathering all your personal information and financial documents, there’s plenty to do before you secure your mortgage.

    When it comes to holiday let mortgages, there tend to be more issues than with regular mortgages, because there are fewer mortgage providers willing to lend on holiday lets. Plus, all those that do lend use manual underwriting methods rather than a simple ‘computer says yes/no’ approach that the high street banks use.

    Luckily, we are here to help guide you through the process and give you the best chance of securing your holiday let mortgage. If you’re currently at the beginning of the mortgage process, here are some key challenges you might face when applying for a holiday let mortgage.

    1. Going it alone

    If we were to offer one piece of advice for getting a holiday let mortgage, it’s to get help from a focused professional! It’s common to think this is an unnecessary way of spending more money, especially if you’ve previously secured a residential or help-to-buy mortgage and think you know how the process works. However, working with a specialist mortgage broker is guaranteed to reduce the risk of a failed mortgage application, as well as significantly minimising the stress and hassle of going it alone.

    Think of it like this: you do your Google search and go contact a mortgage lender directly. You spend a day filling in forms and checking your documents, only to find out that you haven’t met their lending criteria; that’s a day wasted, and you must start all over again. You have even had a ‘hard’ credit search placed on your credit score for your efforts.

    Instead, you could spend that time finding and contacting a specialist holiday let mortgage broker instead. They can quickly assess your status and find a mortgage lender for you. Don’t forget that in the market of holiday letting, there are only a handful of mortgage lenders to choose from and many of these you cannot even find on a Google search. The right mortgage broker knows all of these lenders and can cut out the hours of searching that you’ll no doubt be faced with.

    It’s not only about finding a lender, either. A mortgage broker acts as the go-between with the lender and has the knowledge to deal with queries and confusions that might occur. All you must do is provide the necessary information to the broker, without trying to learn the lingo. As holiday let mortgages are more complicated than residential mortgages, it’s invaluable to have the help of an expert who can explain things in layman’s terms.

    2. Strict lending criteria

    In the same way that people don’t understand the complexity of holiday let mortgages, they also don’t appreciate that the lending criteria are stricter, too. You might think that you have a good deposit and clear credit history so will pass the test with flying colours but unfortunately, it’s not that easy and could be why your mortgage application fails.

    Here are some of the most common things that lenders want to see with holiday let mortgage applications:

    • Minimum income requirement: this will vary on the lender and change depending on whether you’re a sole or joint applicant.
    • Mortgage deposit: typically, you will need a deposit of 25-30%, a larger amount than with residential mortgages.
    • Holiday rental income: you will need to get an estimate of your gross annual rental income, as verified by a reputable letting agent. Most lenders will want to see an amount that’s 145% of your monthly mortgage payments, calculated at 7.5+% interest rates.
    • Personal circumstances: usually a minimum age of 21 and stipulation that you must already own your own property (subject to certain overrides, like if you live in tied accommodation because of your job).
    • Loan regulations: there will be a maximum amount a lender will agree to loan you as a percentage of the property’s value (known as loan to value). If you’re applying for a holiday let mortgage, the maximum loan to value will be around 75%, so you’ll need a minimum deposit of 25%. There will also generally be a maximum loan size which is around £500,000.

    3. The wrong property

    Before you set your heart on a property, you should be aware that there are various red flags that mortgage providers won’t be happy to lend against. While some of these will be more obvious (you’d obviously be wary of buying a dilapidated home in the middle of nowhere) some of them are less so (you might not think it because they’re popular with holiday makers, but wooden lodges pose a big issue).

    Here are some properties that will likely cause your mortgage application to fail:

    • Bad condition: you will know not to buy a house that’s in total disrepair, but you might not know that mortgage lenders will want proof that the property is habitable from day one of the mortgage. This is because they’ll want protection against their loan; essentially, to know that you’re able to earn income from your rent immediately to cover your mortgage payments. So, even if your dream property ‘only’ needs a new bathroom or new electrics, this could cause your mortgage to be rejected.
    • Occupancy restrictions: the place that you want to mortgage and use as a holiday let should be a regular residential property. We often see former farm buildings such as barns that have been converted to homes, but their planning permission is strictly limited to holiday let purposes and as they can’t be lived in as a primary residential home, are not easily mortgageable.
    • Standard construction: in a similar vein, your desired holiday let should be a typical build so in other words, your mental image of a house – four stone walls and a slate roof. This means waving goodbye to shepherd’s huts, or older buildings where construction hasn’t been done to today’s strict standards.
    • Location: you might think it’s a positive if holiday lets are in a bustling area and in some respects, that’s true. However, mortgage lenders don’t want to see properties that are too close to busy and noisy commercial buildings, as this could ruin a guest’s stay. Imagine staying 50 metres away from a nightclub or pub that’s playing music until the early hours, or a row of shops that are open 24/7 – you might not get such a peaceful stay!
    • Energy Performance Certificate (EPC): all lenders require buy-to-lets to have an EPC rating of E or better. With holiday let properties it’s less clear cut as legally, a true ‘furnished holiday let’ (as defined by HMRC), does not require an EPC. Sometimes a lender’s published criteria says that the EPC needs to be E or above, but with the right approach they will make exceptions for holiday lets.

    4. Tricky mortgages

    We see plenty of people whose holiday let mortgage application isn’t your stereotypical ‘normal’ situation. Without help from an expert, this means much more chance of your mortgage falling through. Here are a few examples:

    With interest only mortgages, your monthly payments will only cover the interest on the loan and not any of the capital. You only pay back the original loan when you reach the end of your mortgage contract, which will be the same amount that you borrowed from your mortgage lender at the start.

    The good thing is that your monthly payments will be much lower, but you must prove that you will be in the position to pay the lender off in full once you reach the end of your contract. As we’re talking about a large sum of money, some mortgage lenders deem this situation too risky. So, although interest only mortgages are a possibility, they’re more complex to manage.

    As we’ve mentioned, mortgage lenders want to see that the property being purchased is liveable from day one of your contract. Lenders will be more flexible if only a small amount of work is required, so long as they have assurance that:

    • You have the necessary funds (and have proof of these) required to complete the work.
    • The work can be completed within a certain time frame, usually between four to eight weeks.
    • Although you’re carrying out minor improvements, the property is still habitable from day one.
    • You can continue to make the mortgage payments (and have proof of this), even if you have no rental income while the work is undertaken.

    Again, this situation is more complex than a straightforward holiday let mortgage, and it will undoubtedly help if you speak to an expert to understand the dos and don’ts.

    Remortgages can be a lot trickier than you’d imagine! People usually wish to remortgage for one of two reasons:

    1. There’s no mortgage on the property at present, but the owner wants access to new funds.

    2. There’s a mortgage on the property, but the owner wants a new mortgage. Either a ‘like for like’ mortgage to get a better interest rate, or a larger mortgage to get access to new money.

    ‘Like for like’ mortgages are generally more straightforward. But, if the remortgage involves new money being raised, lenders will have lots of questions! They’ll want to know why the money is needed and what it’s going to be used for. Lenders usually want to see that the cash raised is being used for property purposes, such as home improvements or paying off another mortgage. There are plenty of potential pitfalls with remortgages and lots of financial admin must be done.

    5. Previous residency

    If you previously lived in the property that you now want to be your holiday let (even if that was only for a few months many years ago), you’re highly likely to run into problems with your mortgage. Rather than being able to get a regular holiday let mortgage, you could be directed towards a ‘consumer holiday let mortgage’.

    The Financial Conduct Authority (FCA) decided that accidental landlords need extra protection; if someone becomes an accidental landlord and rents their property without any experience or a shrewd business plan, they are more susceptible to problems later down the road. So, it’s unsurprising that there are strict lending criteria with consumer holiday let mortgages.

    These consumer-type holiday let mortgages are often underwritten on a second home residential basis and so for these ‘accidental landlords’ (people who didn’t set out to rent their property) the process can be much harder to obtain a good outcome.

    So, if you have any history of living in the property intended to become your holiday let, you should check with your mortgage broker or lender straight away, to see if they will allow for a regular mortgage or deem your mortgage as a consumer-type.

    How can mortgage brokers help?

    We commonly see people who underestimate a mortgage broker’s role and think it’s solely to get you the best interest rate. The truth is that any broker should be able to do that. The real value – and where they can reduce the risk of your mortgage failing – is in their understanding of the mortgage application landscape, and in knowing all the tricks and calculations the underwriters use. For these reasons, the true value of using a broker is that you have a far greater chance of success. When you compare mortgage broker fees to the success or failure of a £500,000 property purchase, you can see that in the grand scheme of things, it’s immaterial.

    Plus, mortgage brokers have the means to override certain lending criteria such as:

    • Day one remortgages: these are intended to let you remortgage your property immediately after completion, and not all lenders offer them.
    • EPC issues: as mentioned earlier, if the grade isn’t as high as would be preferred.
    • Private dwellinghouse clauses: a private dwelling (such as a residential home, private lodge, private rooms etc) will sometimes have a clause in the lease to stipulate no renting.
    • Loan sizes.
    • Minimum property values.

    Mortgage brokers such as HCM also tend to have exclusive and semi-exclusive rates from the mortgage lenders, but these rates come and go. However, a good mortgage broker has the means to secure any good interest deals for you.

    So, what now?

    As you can see, getting a holiday let mortgage isn’t straightforward! If you’re in the position to buy a holiday home, it’s highly worth getting help with your mortgage – it’s the easiest way to avoid falling into one of the traps we’ve discussed in this article. Speak to one of our team here or fill out an initial assessment by clicking the button below!

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    Andy Soye

    Founder @ Holiday Cottage Mortgages
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      The information contained in this article is accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time and so please speak to one of our Consultants to confirm the most accurate up to date information. Nothing in this article constitutes financial advice. You understand that by clicking any external links on this page that you will be leaving the website of Holiday Cottage Mortgages and we cannot be held responsible for the content of this external website. Please always consult your accountant or solicitor for all financial, taxation or legal matters.