The exponential rise of AirBnB and similar sites is encouraging landlords to diversify into holiday lets as the returns can be considerably higher than buy to let. But how do you finance these properties and will your existing BTL lender allow you to switch income model?
AirBnB, Holiday Lettings, Home Away, Owners Direct, I could go on. The number of holiday accommodation sites is big business with operators promising property owners with higher returns. Add to this the less favourable income tax environment and stricter borrowing rules for buy to let landlords, and it’s no wonder that we are seeing an increasing number of investors get in touch to discuss getting the finance to move into this sector.
But how easy is it? Below you will find some answers to the questions our buy to let landlords most commonly ask.
1. Will I need to remortgage to turn my buy to let into holiday let?
Probably! Most buy to let mortgage contracts require properties to be let on Assured Shorthold Tenancy agreements. ASTs typically start as fixed terms of six months to three years which means that lets for shorter periods are not permitted.
2. How will the lender know if I switch my property from a buy to let into a holiday let?
If a holiday-maker can find your property online, then so can your lender! When applying for a buy to let mortgage, lenders will always check to see if the property is listed on AirBnB and similar sites, particularly if the property is in a tourist area.
If you already have finance in place and decide to switch from buy to let to holiday let, the lender may not check but this doesn’t mean you won’t be found out. We’ve helped several landlords who have been in this situation…
AirBnBs can attract a rowdy crowd - stag parties, hen dos and the like. Recently we helped a landlord remortgage because his buy to let lender discovered he was doing short term holiday lets. The neighbours had complained to the council about noise. The council notified the lender. The lender asked the landlord to repay the loan. The lender would have been within their rights to add the landlord onto the Hunter fraud prevention list. Fortunately, this didn’t happen and we were able to find a solution for the customer.
3. Which lenders offer holiday let mortgages?
Some buy to let lenders provide specific mortgage products for holiday lets, others lend under a broader commercial mortgage remit. Although borrowers can go directly to a few lenders, to get access to the entire holiday let mortgage market, you will have to use a specialist broker. If you want to ensure you get the best deal for your specific circumstances, we recommend the broker route.
4. How many lenders offer holiday let mortgages?
Sadly, Market Harborough Building Society withdrew from the commercial holiday let mortgage market in 2017. In fact, they shut down all their commercial lending departments leaving a noticeable hole in the market place and seeing many of our close friends seeking alternative employment!
Currently, I would say there are only eight properly active lenders in the holiday let mortgage market. Of these:
- Only four or five will lend to portfolio landlords, i.e. landlords with four or more distinct mortgaged buy to let properties.
- Only three will lend to limited companies
5. What are the mortgage rates for holiday lets like?
Like all mortgage rates, pricing is pretty low at the moment but will likely change, if and when the base rate goes up. Some market commentators no longer think the Bank of England will raise rates in May but in my opinion, they will have to go up at some point this year. Generally speaking, borrowing as an individual is cheaper than borrowing through a limited company.
6. What price are holiday let mortgage rates for individuals?
Pricing starts from c1.75% to c4.39% for a two-year fixed rate with fees between 0% and 2% of the loan amount, and rent to interest calculation (RTI) in the region of 145% @ 5.5%. In other words, a loan of £375,000 on a property valued at £500,000 requires annual rental income of £29,906 (that’s £2,492 pcm).
If you prefer to lock in for longer, five year fixed rates for individuals range from c2.20% to c4.98%. Lender arrangement fees will be similar to their two-year counterparts but the RTI will be more favourable, from 125% @ 4.98%, which really helps if you need to maximise borrowing. In other words, a loan of £375,000 on a property valued at £500,000 requires annual rental income of £23,340, (that’s £1,945 pcm).
7. Which mortgage lender is best for holiday lets?
In my opinion no one lender stands out from the crowd. Most will assess debt serviceability based on AST rental income not projected holiday let income. Many will require the borrower to have earned income of between £10,000 and £25,000; others may need £40,000.
Whether you are a portfolio landlord or not, the banks will take into account leverage across your entire portfolio, including residential mortgage commitments. They will also take a close look at your personal expenditure, cross referencing tax returns and rental bank statements! This means that if you are after high loan to value for a holiday let acquisition, unless you are a pro-footballer or barrister – forget it!
8. Where can I get a larger loan for a holiday let?
If you are looking to borrow a larger amount, it may be worth using a limited company. Do take specialist advice first though! Lots of our residential landlord clients own properties in a limited company, particularly those who are High Net Worth individuals and don’t need to draw a wage from the company. They often prefer to pay corporation tax on the profits of the company rather than paying tax at 40% to 50% on rental profits! And of course, they are building up funds in the company to use as a deposit towards another holiday let.
We have access to a commercial lender that takes a pragmatic approach to these deals. They can lend to landlords with four or more mortgaged rental properties and to limited companies. These lenders have an in-depth understanding of nuances of the market. They can lend between 60% and 75% loan to value with repayment mortgage terms of 15 to 25 years. Some will even offer interest-only facilities.
Their arrangement fees can be negotiated and they will accept projected holiday letting income over standard AST rental income. Their rates are circa 3.74% for a discounted deal and by gosh, they really know their market place. They will also consider lending where an owner-occupier lives in the main house and the business has holiday lettings attached.
Remember, Mortgages for Business has access to all of the holiday let lenders so if any of the above points ring true and you would like us to help, pick up the phone to me or my colleague Gareth Richards using the details below.
Call me: 01732 471644
Email me: firstname.lastname@example.org