Understanding holiday buy-to-let mortgages
Mike Taylor is head of marketing, products and savings at Mansfield Building Society
The rise in staycationing has fuelled an increase the use of properties as holiday lets. Attracted by the potential returns and keen to diversify their portfolios, existing buy-to-let landlords are expanding their portfolios into holiday let, as are would-be investors who dream of owning a holiday cottage that will pay for itself.
As a result, intermediaries have witnessed a rise in mortgages for holiday let mortgages, i.e., loans for properties that will be rented out on a short-term basis, for at least part of the year to tourists – as a business. These commercial transactions are not difficult to administer but like all niche products, they do require a certain level of understanding.
The number of lenders in the market is relatively small, although this is changing. In the past, holiday let mortgages were usually confined to mutuals, including the Mansfield; however, in recent years other lenders, including some specialist funders, have joined the fray.
According to Business Moneyfacts, in September this year there were 25 lenders between them offering 186 products, up from 21 lenders and 149 products in April.
So, not the largest selection in the world but certainly enough to find solutions to fit a variety of borrowing circumstances. It’s worth noting however, that not all sourcing tools list holiday let mortgages in depth so advisers not experienced in this field should consult a sourcing system and then talk to the relevant lender’s business development team.
Recently, there have been reports in the press of landlords turning their buy-to-let property into holiday accommodation. This presents an opportunity for brokers to reach out to existing clients to let them know that if they are thinking of going down this route, they may need to refinance.
For the most part, standard buy to let mortgages are designed for use on properties that will be let for a minimum of six months on assured shorthold tenancy agreements (ASTs).
As such, the majority of products do not cater for holiday accommodation and borrowers risk breaking the terms of the mortgage contract if they let the property out on a short-term basis.
This should not deter borrowers, however, as holiday let terms can actually be favourable. For example, the Mansfield takes a seasonal approach to affordability and the result can be much fairer than if it were on an AST.
Like a buy-to-let mortgage, lenders will want to ensure that the rental income is more than sufficient to meet the monthly mortgage payments and usually they require between 125% to 145%. However, the way affordability is calculated is different.
Lenders like to look at past performance and take either an annual average, or base what is acceptable on a proportion of the annual average of low, mid and high season income – both minus a percentage for agency fees. Many will also allow top slicing, i.e., take into consideration earned income or other personal wealth.
On property that has not operated as a holiday let in the past, lenders like to see much more information including a professional opinion on the potential for earning income and occupancy levels, as well as the correct planning permissions, and confirmation that the property has no title, local or occupancy restrictions. At the Mansfield, we can consider properties that have certain restrictions, such as right of way over land or unusual property types.
To qualify for a holiday let mortgage, the properties themselves have to pass muster. Most lenders stick with standard units, e.g., property that could be easily sold or rented out on a buy to let basis if the holiday market dipped.
So, lodges, static caravans, B&Bs, parks and complexes tend to be a no-no. Properties may also have to meet HMRC’s Furnished Holiday Let (FHL) requirements.
Most holiday lets are seasonal by nature and because the rental income does not flow in steadily on a monthly basis, they are deemed riskier propositions than buy to let, so pricing is a little higher and rates tend to be available on a 2- or 5-year basis with interest only terms.
Currently, pricing starts with a ‘three’, although in my opinion, finding the lowest rate is not the driving factor for borrowers, rather it’s finding lending criteria that meets the borrower’s circumstances.
If advisers are sitting on the fence with holiday let mortgages then it is important to bear in mind that factors such as location and property size mean that the average property price of a holiday let can be higher than that for a typical residential mortgage and so the proc fee would be greater.
With the holiday let market booming, advisers should ensure they are fully equipped to deal meet the needs of investor and landlord clients.
At the Mansfield we take a common sense approach to underwriting and affordability, as well as considering property types that other lenders will avoid.