Having recently benefited from multiple heatwaves in the UK, the attraction of a rural or coastal bolthole has become increasingly popular. With staycations on the rise, we’ve seen an increase in enquiries from clients looking to purchase a holiday-let home however, they’ve been asking us about buy-to-let (BTL) mortgages. As they are independent products with different purposes, here we’ll demystify the two products and confirm why having the right one is so important.
What is a Buy-to-Let mortgage vs a Holiday-Let mortgage?
A buy-to-let mortgage is a mortgage product typically designed for landlords who want to buy property in addition to their main residence, to let out on a long term basis. Whereas a holiday-let mortgage is a mortgage on a property that is rented out on a short-term basis, typically to holidaymakers, often as a business generating additional income.
Buy-to-Let mortgage criteria
An ideal solution for clients looking to invest in property, a buy-to-let mortgage is a good solution if you already own property and wish to rent it out, or you’re looking to purchased additional property for this purpose.
Typically, rates on BTL mortgages tend to be slightly higher than those on residential mortgages due to the increased risk from the lenders point of view. For example, they may lack confidence at tenants’ reliability for paying their bills each month and therefore, they’ll not receive their mortgage payments. However, do not let this put you off. There are multiple providers of BTL mortgage products all competing for competitive rates. As a general indication:
- Deposit: The deposit for a BTL mortgage is often around 25% of the property value, but it can vary between 20-40% depending on the lender.
- Mortgage type: Often landlords take BTL mortgages on an interest only basis. This means you’ll pay off the interest each month, but you won’t make capital repayments.
Holiday-let mortgage criteria
Holiday-let mortgages are often deemed a specialist product that requires expert knowledge.
Due to their specialist nature, there are fewer providers on the market willing to offer holiday-let mortgages. However, below offers a general indication of what criteria is to be expected:
- Minimum and maximum mortgage amounts: Typically, these range from as low as £25,000 up to £1 million plus. For loan amounts of this much, we would suggest speaking to our high value private client team who can assist in arranging bespoke values of this amount.
- Loan to value: Some lenders may set a maximum loan-to-value (LTV) ratio of 70%, but in some cases they may stretch to as high as 75%.
- Deposit: You’ll likely need between 25-30% deposit for a holiday-let mortgage.
Considering these points, there are benefits to having a holiday-let home including the potential earning power; holiday-let homes often have high returns. They also can have tax advantages surrounding them, however it is vital you seek professional tax advice with an appropriate tax adviser before proceeding.
Good to know
When applying for a holiday-let mortgage, lenders will usually ask you for a projection of how much you expect to earn from renting out the property. As a general rule, you must be able to make a gross (pre-tax) rental income of around 125%-145% of the monthly mortgage repayments, when calculated at a 5.5% interest rate. By forecasting what you expect to earn, lenders may feel more comfortable in providing you with a mortgage loan. This rental income will typically be assessed based on an average of the high, medium and low seasons of popularity depending on the property type and location. We have access to lenders that will allow you to rent out your residential property up to 120 days a year on a holiday let basis, if you were looking to do things on a more ad hoc basis.
It’s also important to note that holiday-let mortgages cannot be used on your main residence. For this, a residential mortgage is required. But, if you intend to rent out the property on a long-term basis then a Buy-to-Let mortgage will need to be arranged. We appreciate this can be confusing, so if you would like more information speak to an adviser today about the differences.