Mortgages for holiday lets

Are holiday lets profitable? What mortgage rates are available from lenders? What deposit do I need? Andy Elley, consultant mortgage broker explains.

I thought I would treat the family to a holiday cottage in Cornwall during one of the weeks of the school summer holidays. What a fantastic place Cornwall is; great for the kids with the super sandy beaches (not like the South East) and childhood memories of golden ice creams, super countryside and surfing on body-boards. Of course, back in the 1970s for my parents it was mainly camping on the family agenda, no doubt, down to the costs involved with renting a caravan or cottage for a week.

My wife does not do camping – or so she tells me. Therefore a holiday cottage it must be. I set to work trying to locate a decent property near to St Ives or similar on the north Cornish coast. There appears to be hundreds advertised on many websites. One website had 269 in St Ives alone. Other popular locations had hundreds of holiday lets advertised.

To my surprise, most of the decent stock has already been booked (how organised are some people? – They must have too much time on their hands!). The few properties that remain for the busy holiday period look more like holiday park locations and gosh how expensive they are. Maybe there is a business angle to holiday rentals…

I write a lot of commercial mortgage transactions for holiday parks, guest houses and hotels and this set me thinking about the opportunities for my clients to purchase properties for holiday let. This idea raises lots of questions:

  • Is it profitable?
  • Who will look after the property?
  • What mortgage rates are available from lenders?
  • How easy is it to complete a transaction? 
  • Do the lenders want our clients to earn megabucks to service the mortgage

All sensible questions when doing a ‘sense check’ for a potential purchase.

Recently, one of my colleagues took an enquiry from a client looking to purchase a six-bed holiday let in Cornwall for the sum of £500,000. Apparently, a normal six month AST contract would generate £21,000 of annual rental income and the holiday let would make in excess of £38,000, averaging £950 per week over a 40 week letting schedule. The holiday let income is therefore more than 80% higher income than a standard AST contract! But, the million dollar question, what would our lenders need to consider a mortgage?

I approached some providers to find more about current LTVs, deposits and mortgage rates for holiday lets. 70% loan to value as a maximum seems to be the norm.

At a £500,000 purchase price and £350,000 of loan, the interest payments for a two year fixed rate is currently only 2.49% or, for a five year fixed there is a rate available at 3.59%. This makes the monthly payments £726 for the two year fixed and £1,047 for the five year rate – not too bad really!

The rates offered were for loans to individuals. The lender could lend more for existing ‘trading holiday lets’ and they could consider lending for ‘first time holiday lets’. The lender was flexible in its approach and could consider assessing the overall mortgage requirement based on background income – in my opinion the criteria set allows for flexibility, and a common sense approach seems to be prevalent!

I made further enquiries with another lender which confirmed it could lend between £100,000 and a whopping £1,500,000 to newly formed limited companies. It is worthy to note that for the sake of ‘tax efficiencies’, limited company borrowing is a ‘hot topic’ at present.

The limited company rates were also reasonable at circa Bank Rate (0.5%) plus 3.74% which equates to £353 interest per month for every £100,000 of borrowing!

The lender also confirmed it would consider lending on multiple holiday lets owned on one freehold title (multi-unit), in either a limited company or up to two units in the individual’s name – wow!

I scoured the internet for trading holiday let businesses for sale and this multi-unit scenario appeared to be quite usual for trading holiday lets, no doubt with larger properties often having outbuildings converted into rental units. Therefore there is finance available for these acquisitions with interest only options and not on expensive commercial terms!

So, now that I have worked out some options for my clients purchasing holiday let’s- I must go back to the grindstone and internet searches for my summer holiday cottage – this is sapping my time! I do remember a friendly bank manager (to whom I have introduced plenty of commercial business) has offered me the use of his static caravan. It’s not located in Cornwall, but at the end of the day it is a break I guess!

If you have any questions on finance for holiday lets please give me a call on 01732 471644.

Related case studies:

Purchase of low value holiday flats

Associated transaction on holiday let by directors of SPV

Interest only refinance of 10-bed guest house

Related FAQs:

What if you want to buy a second home/holiday home and let it out?

Do borrowers need a minimum income to invest in a holiday let? What about retired people?

If a property is bought specifically as a holiday let, is it a BTL mortgage or does it have to be a special holiday let mortgage?