There are many different types of mortgages to choose from, depending on your specific situation.
Some are designed for certain types of employment, such as self-employed or company directors. Others are geared towards the property itself, or perhaps how it will be used and occupied.
This article looks at when a holiday rental mortgage would be needed, how they work and how to get one.
What is a holiday rental?
Most mortgages are granted against residential properties. Typical property types would be houses, flats, bungalows, apartments etc. The lenders include ‘how’ the property will be used when assessing a mortgage application.
So a residential mortgage for a home you will live in is fairly low risk and there are many lenders offering solutions for this. Then there are the properties that will be rented out, these are generally considered slightly more risky from a lending perspective.
In terms of mortgage lending, a holiday rental would be a property that is primarily let out, for short durations, to guests and holidaymakers.
This differs from a buy to let which will be rented out to tenants who then live in the property permanently and use it as their main residence.
What’s the difference between a holiday let mortgage and a buy to let mortgage?
What is a holiday rental mortgage?
So this would be a specific type of mortgage which can be used to buy, or refinance, a holiday rental property. More commonly referred to as a holiday let mortgage.
The lender will be expecting the property to be let out only for short periods and for there to be times during the year when it may be empty.
Also holiday let properties can be used by their owners for holidays and breaks, with most lenders providing their consent for this automatically.
A nice little perk!
Is a holiday rental the same as a holiday home?
For many people this may seem a confusing question. Of course, they are both the same, they are both holiday properties!
While this may seem to be true, the fact is that lenders treat them separately. Again this will depend on how the properties are used and occupied. Airbnb is a popular option but not every lender will be happy with this.
Holiday rental
We would expect this to be a fully furnished residential property that is mainly used for short term letting, with some minor personal use.
Holiday home
This could be the exact same property. But the difference would be that its main purpose is to be a second/holiday home for friends and family to use, with incidental short term letting (if any).
Holiday let
This is really the same as a holiday rental. ie primarily used for generating an income via letting.
How do these mortgages work?
You will have the usual choices for the repayment method and interest rates, although specific options will differ between lenders.
Repayment method
Interest only or full repayment should be available from the majority of lenders. Unlike residential mortgages, mortgages for holiday lets aren’t always on a repayment basis.
Interest rates
Depending on the lender, a choice of fixed interest rates, variable and tracker.
Mortgage deposits
The mortgage deposit will directly influence the loan to value (LTV) available. Most of the time you will need a 25% deposit, with a corresponding 75% LTV mortgage.
Fees
The usual types of mortgage fees will apply. So a mortgage product fee, arrangement fee, broker fee, valuation fee etc.
Size of mortgage
In the same way that a buy to let mortgage is calculated using the rental income, a holiday cottage mortgage will be determined by the income it can generate.
The actual, or potential, income needs to be confirmed by a holiday letting agent. The lender will then use this to calculate the maximum loan.
The holiday rental property
Residential home mortgages are granted on self-contained dwellings, such as flats and houses, that you are able to permanently occupy.
Nice and simple!
In the world of short term lets it is not always this straightforward.
Occupancy restrictions
There are quite a few properties that have a usage restriction applied to them. Restrictions can be on a per-property basis but also can apply to an area or certain class of property. Holiday let occupancy clauses, or 106 restrictions, are placed on a property by the Local Authority Planning Department.
Some restrictions allow 12 months holiday let use only but with a maximum occupancy of 30 days by one “occupant”. They can also state that the property can be let for 11 months but must remain empty for a specific month each year.
Restrictions like this mean that the property will be unsuitable as a main residence or a buy to let, because no-one is allowed to live there permanently. For this reason it is important to cover this point when searching for potential properties as it will affect your options.
Mortgages are readily available from lenders operating in the short term letting and holiday let sectors.
Mixed use property
This is slightly more unusual but would generally be a large property/house that has converted buildings, an annex or barns on the land that are used for short term lets. Finance is available for these and it is generally setup as a commercial mortgage.
It is classed as mixed-use as the owner will be living on site (residential use) but the separate properties will be used as short term lets (commercial use).
Multi-unit property
Multi-unit holiday lets simply means that there are other buildings or dwellings that are commercially used for holiday lets on the same property title.
A simple example could be a large house which has been converted into three self-contained flats, all of which are rented out as holiday lets. Again, finance for this would be on commercial terms.
What kind of mortgage do you need for Airbnb?
Are you considering stepping into the world of Airbnb hosting? Whether you’re dreaming of turning your spare room into a cosy haven for travellers or planning to invest in a property solely for short-term lets, understanding the mortgage landscape is an important first step. In this article, we’ll guide you through the maze of mortgage options tailored for the unique demands of Airbnb hosting.
What does fully furnished mean?
A fully furnished holiday let is a property that provides all the essential furniture, appliances, and amenities guests need for a comfortable stay.
From cosy beds to well-equipped kitchens, towels, and soft furnishings, these homes away from home cater to the needs and preferences of the modern traveller.
What does fully furnished mean?
Are they available to limited companies?
Yes, lenders are willing to lend to limited companies for a holiday rental property. The company itself must be set up in the UK as an SPV, or Special Purpose Vehicle. Our SPV Guide covers this topic in detail.
What about a serviced accommodation mortgage?
If you run a property as serviced accommodation you will only be operating short term lets.
The guests could be tourists, holidaymakers, business travellers or contractors. A holiday let rental mortgage would probably be suitable for this, you would need your broker to check.
Our article What is a serviced accommodation mortgage? takes a deeper look.
Where can you get a holiday rental mortgage?
There are only a limited number of lenders offering holiday let mortgages for UK properties.
It’s quite a specialist area and for the multi-unit properties, or those with occupancy restrictions, experience and knowledge of the market is essential.
To stand the best chance of striking a deal with a specialist lender you need to work with an experienced holiday let mortgage broker who has access to these niche players.
Due to the complexity of holiday lets and holiday rentals, many lenders will only accept mortgage applications when they have first been vetted and approved by a broker.
A lot of the buy to let mortgage companies now accept holiday lets. However, many of these are only interested in the simple cases and will use AST rental income to calculate the mortgage.
As holiday let income is generally a lot more than for buy to let, this gives you a much lower loan figure.
holiday rental mortgage broker
So for the best rates, the best choices and the best overall outcome we would suggest speaking with a qualified adviser.
Find a mortgage broker
FAQ
Frequently Asked Questions
How would you finance a second property?
A second property that will not be let out (or just occasionally) can be financed using a second home mortgage.
Do mortgage brokers charge fees?
Yes most do. The advisers that we work with will charge you a fee. This will be confirmed in writing to you.
How much deposit will I need?
For most holiday rentals the minimum deposit is 25% of the purchase price/valuation.
I don’t want to rent out my holiday home.
That’s fine. A holiday home mortgage or second home mortgage would be the most suitable. As there is no rental income, the second mortgage must pass the lenders affordability tests.
Are these commercial mortgages?
Most holiday lets can be financed using standard mortgages, suitable for short term lets. Commercial finance is needed for multi-units, mixed use and unusual or very large estates and grounds.
