Before you apply for a holiday let mortgage, it is important to think about your mortgage deposit. You might not think that putting down a deposit would be in any way complicated but trust us – it is! Some of the process is surprisingly technical and from our experience, it helps to have some expert guidance along the way.
We’ve put together a comprehensive guide to discuss how it all works; from how much of a deposit you will need, to finding the lender that’s right for you.
How much do you need for your Holiday Let Mortgage Deposit?
When it comes to securing a holiday let mortgage, the first things people want to know are:
- How much will I be able to borrow?
- How much deposit will I need?
- What will the interest rate be?
Unfortunately, there isn’t one simple answer to these questions as the amounts are dependent on a number of factors. As most people don’t have tens of thousands of pounds sitting in their bank account, the key thing is to understand is this: how much deposit is required. This is especially important because when it comes to holiday home mortgages, you will need a bigger deposit than with a traditional mortgage.
Deposits and interest rates
When it comes to holiday let deposits, it is important to understand the concept of loan-to-value (LTV). Essentially, the LTV is the maximum amount that a mortgage lender will agree to loan you, in relation to the value of the property.
With a holiday let mortgage, the maximum loan you can get is 75% to 80% and so realistically, the minimum deposit for holiday let mortgages is 25% to 20% which compared to a traditional mortgage (where the minimum can be as little as 5%) is a considerable jump in accessible cash you’ll need. If you put down a bigger deposit then the loan size reduces and the LTV reduces, resulting in most cases to a reduction in the interest rate, as the risk perceived by the lender is less. Interest rate changes tend to happen at certain key changes in LTV.
So, at the maximum loan size of 80%, you’ve got a set of interest rates. If you put down a larger deposit, say 30%, then the LTV has decreased to 70% and you will generally get a slight improvement on the interest rates.
This pattern continues; if you put down even more deposit, up to 40%, the LTV is now even lower at 60% and you will be able to get the best interest rates possible. It’s worth noting that typically, beyond this point, it doesn’t matter how much deposit you put down, as you won’t get a better interest rate.
|Deposit||Borrowing||LTV||Interest Rate||Monthly Payment (Interest Only)|
Example monthly payment table based on varying LTV & interest rate. Assumed property value = £400,000.
The impact on LTV and interest rates will often affect how much deposit someone decides to put down. Some people will approach the situation saying, ‘I’ve got money and I want the best interest rates, so I want to put down a deposit of at least 40%.’ On the other hand, some people will say, ‘I’ve got to make my money stretch to various other things, so I’ll put down the minimum deposit of 25%.’
How much is too much?
It isn’t a common situation, but some people will have a lot of money and only want to take out a small mortgage – £25,000 for example. The problem is, you generally can’t get such a small mortgage!
If your deposit is very large, you have to make sure that the loan you’re requesting is greater than a lender’s minimum loan size. Typically, the minimum amount that a lender will loan you ranges from £50,000 to £75,000.
This might be surprising, but if you’re looking for a smaller loan, it just isn’t worth it for the mortgage company. Once they’ve gone through the entire process to lend somebody a figure less than this – including all the admin, the credit checks, the legalities, and so on – it just won’t make them enough money.
Keeping money back
It’s easy to forget that when you’re purchasing a property, there are a number of additional costs on top of your mortgage deposit. Stamp duty could be a very significant amount, especially with a second home because you may have an additional 3% to pay. There will also be legal fees and other mortgage-related costs such as surveyors, application fees and mortgage broker fees.
On top of this, it is likely that you’ll have to spend money on the property itself. You might need to do work on the home, to refurnish and redecorate it, and to purchase necessities such as cutlery, toiletries, bedding and so on.
For these reasons, when you’re thinking of your initial deposit, you should take into consideration the additional spend that will be needed to make your holiday home successful and allocate those costs out.
As discussed above, some lenders will require a lower deposit than others. So, even if you have £80,000, it might be a sensible idea to put down a deposit of £70,000 to ensure that you have funds left over for additional mortgage costs and work on your property.
It could cause major problems if you spend all of your money on the deposit and then find yourself faced with additional costs, without any money left in the bank. It is always worth doing some financial planning before you begin the mortgage application process, to avoid potential disaster!
Where will your Holiday Let Mortgage Deposit come from?
When you apply for a mortgage, lenders will always have to ask the question, ‘Where does your deposit money come from?’ Generally speaking, the money will come from one of four sources…
Personal savings and assets
Most commonly, people get their deposit money from a savings account, an investment ISA or a pension drawdown. In other words, a liquid or semi-liquid asset that they can use to put down the cash.
Lots of people are given their deposit (or part of their deposit) as a gift. Where a gifted deposit is being made, the money can only really come from a direct family relation. Normally, banks will not accept gifts from friends or businesses. This is thought to be because lenders don’t understand why a friend would be gifting someone a large amount of money; they just don’t believe it. Whereas it makes sense why a parent would give money, as you could imagine that they would give money as part of inheritance tax planning.
It’s important to note that the money must be a gift and not a loan. If a client says, ‘My father is going to lend me the money and I’ll pay it back over ten years,’ this is a big no. This is because a deposit that has been lent puts risk on the property; there’s a debt involved with the deposit and lenders don’t like it. A loan also suggests that the buyer can’t even afford the deposit for their property, because they’re having to borrow it.
Essentially, the deposit has to be a no strings attached, non-repayable gift, from a direct family member.
Money from existing property
A very common situation is that somebody gets their deposit from a non-liquid asset. Where can you get a very large sum of money from, very quickly? Another property.
A lot of people look at their main residence and question whether they have excess equity in that property. For example, if they’ve been paying down their mortgage for years, or if they have owned the property for years and it has doubled in value, they might be able to pull a large sum of money out of it.
These people will either get a further advance on their existing mortgage or will re-mortgage their residence completely. In other words, they take advantage of their existing equity to form their deposit.
Other people with multiple investment properties might elect to re-mortgage a buy-to-let or another existing holiday let to generate the cash for the new deposit. Such transactions are normal and happen all the time.
You often find that a person’s deposit comes from their inheritance. For example, they have an amount of money that’s been inherited from their grandma, and instead of leaving the money sitting in the bank, they want to do something with it.
This isn’t classed as a ‘gifted’ deposit, because this cash will have come through a formal probate process and is completely legitimate. So, even if the money has come from a friend who has died, it will be accepted by lenders, because the money has been administered by a legal authority.
Proof of Deposit
When you think about holiday let mortgage deposits, you need to think about the mortgage lenders and what they will require from you. Depending on the different scenarios, what kind of evidence do you need to provide, to prove that you have your deposit in place?
Personal savings and assets
If your deposit is coming out of existing savings or investments, the lender will need to see your bank statements, which should show that the full amount is present and available. They will also want to see your last three months of accounts, as evidence that the cash has been steadily building up.
Lenders will want to check that the balance hasn’t had a sudden injection of cash – £50,000 from an overseas account, for example, as this could signal money laundering. They will want to see where your cash has come from and how your savings have accumulated (usually this will be from earnings).
Where the money is a gift, you will need to provide a signed gifted deposit letter; essentially a factual statement saying that the donor is giving the money away – no strings attached, and no repayment required.
By signing this letter, the donor is giving their consent to have their information passed across to the lender as part of the mortgage application. The lender then has to ask the donor for three months’ bank statements showing where they got the money from – again, to prove that there is no money laundering involved in the transaction. In other words, the source of the deposit has to be verified, the same as it would be if it were coming directly from the buyer’s own bank account.
Money from existing property
When you’re getting cash out of an existing property, lenders will normally need to see a copy of your mortgage offer. This will be together with a solicitor’s letter that explains that the solicitor is acting on your behalf and the funds will be made available to form the holiday let deposit.
If your deposit money comes from inheritance, the lender will require a letter from the solicitor, confirming you are going to be paid £30,000, for example, by way of the inheritance, on a specific date.
Where will you get your Holiday Let Mortgage from?
Lenders will always be interested in your deposit; how much you want to put down and where it came from. Your deposit amount drives the LTV, which in turn drives the interest rates. This information will determine which lender is best suited to you.
Our experts know which lenders operate best at which LTV levels. For example, if you’re looking at 60% LTV, we know which lender offers a market-leading product on a two-year basis, and which lender has the best product on a five-year basis. If you’re looking at 70% LTV, there will be a different lender and product which is more suitable for you.
So, we understand how your deposit determines your choice of lenders. This, in turn, leads to the question, ‘How does that lender work?’ We cannot forget that each lender has their own specific criteria which need to be met. Read more about holiday let mortgage criteria.
At HCM we are familiar with each lender’s individual criteria and are therefore in the position to determine which lender is the best match for you. For example, you might be planning to let your property on Airbnb; we know that some lenders will not lend to you if this is your intention.
In other words, even if you have a decent deposit in place and think that you are a viable loan candidate, finding the right lender can be a complicated task. It is HCM’s job to find the lender and product which is perfect for your individual circumstances – saving you a lot of time, effort and probably frustration along the way.
Get started with HCM
An initial chat with our expert consultants will help you understand which route is best for you. Once we have your information, we are able to do the hard work on your behalf.
If you want to find out what options you have available, why not complete our free initial assessment here. It only takes five minutes!