Guide to holiday home mortgages
- The holiday home mortgage you need will depend on the intended use and whether it’s in the UK
- Holiday-let mortgages in the UK are more of a niche product but they are readily available
- Overseas mortgages are more complicated - you can go through a UK bank or a bank in the country where you’re purchasing
Holiday home mortgages have a reputation for being difficult to arrange, but - depending on your circumstances - it should be perfectly possible to sort out financing, whether you’re looking to buy in the UK or overseas.
The type of mortgage you need and where you get it from will depend on how you intend to use the holiday home, as well as the country it’s located in.
Depending on the circumstances, you may need to consider alternatives to a holiday home mortgage - these alternatives might be a better option for you even if you could take out a mortgage.
Residential mortgages for UK holiday homes
If you’re purchasing a holiday home for your own use and don’t intend to regularly rent it out, arranging a mortgage should be reasonably straightforward.
You’re essentially taking out a standard mortgage, but if you already have a mortgage on your main residence it may be called a second home mortgage.
The main complication if you already have a mortgage is that the lender is likely to be stricter in its assessment of affordability criteria when you apply and will take into account the repayments on your first mortgage.
You’re likely to need a large deposit (25% is typically the minimum) and may have slightly higher interest rates and fees than on standard mortgages.
Your choice of lenders will also be more restricted, as not all providers offer second home mortgages.
If you are taking out a standard residential mortgage for a holiday home, be careful if you plan to allow family and friends to use it; it’s possible that such use will be prohibited, or will have time limits attached.
“Lenders will look at affordability largely based on personal income,” said David Hollingworth of London & Country Mortgages.
“You may be able to get standard mortgage rates and you may even be allowed to let the property for a certain period of time, perhaps around 18 weeks each year.”
Holiday-let mortgages for UK properties
If you intend to let out your holiday home as a business, you’ll need to consider a dedicated holiday home mortgage.
This is a niche area of finance and most providers are small building societies, which can look at unique circumstances and underwrite on an individual basis.
Nevertheless, these mortgages are readily available and a mortgage adviser can help you find the right deal.
A holiday let mortgage is an option I prefer to buy-to-let and I’m sure that people are looking at this more now because of the tax changes. It’s even more of a business to commit to than buy to let, but at least you also get some enjoyment out of it.
Mark Dampier, Hargreaves Lansdown
Be aware that you can’t use a standard buy to let mortgage to purchase a holiday home. Buy to let products usually ask that the property is let to tenants on an assured shorthold tenancy, which won’t apply to holiday lets.
The most you’re likely to be able to borrow on a holiday-let mortgage is 75% of the property’s value and you should be able to access most of the best deals if you can bring that figure down to 60%.
Rental income is seasonal and can vary enormously, so when assessing affordability a holiday-let lender will look at the actual rental income achieved from a holiday property and/or speak to a local holiday letting agent for an opinion.
This assessment will play a major part in determining how much you can borrow, with lenders likely to look for returns that cover at least 125% of mortgage interest payments.
“Many lenders shy away from holiday-let mortgages because of the fluctuation in rental income, which is what they look at in an assessment of mortgage affordability,” said Hollingworth. “There may be an extremely good income in high season, but this can reduce enormously at other times of the year.
“You need to understand that there are fewer lenders available than with a traditional buy to let. This can lead to slightly higher rates and fees, but this may not be to a hugely significant degree.”
Mortgages for holiday homes outside the UK
If you require a mortgage secured against an overseas holiday home, the two broad choices open to you are:
- Borrowing from a UK bank
- Borrowing from a bank in the country where you’re buying the property
UK banks offering overseas mortgages
If you’re dealing with a UK provider, you’re likely to have to look to the major high street banks.
They’re only likely to lend on properties in countries where they have offices and - after the mortgage is arranged - you’ll probably be dealing with the overseas office rather than the UK branch.
It should be easier to arrange a mortgage in a popular, well-known market such as France or Spain, rather than in a more far-flung location.
Overseas banks for holiday home mortgages
If you’re looking to arrange a mortgage in the non-UK country where the property is based, it’s likely that you’ll go through a specialist broker.
A broker should be able to help with things like solicitors and estate agents, but it’s important to note that they’re unlikely to be regulated by the Financial Conduct Authority.
Mortgage arrangements will vary from country to country, but you may find that you’ll require a higher deposit percentage than for a UK property.
Taking out a mortgage on an overseas property leaves you vulnerable to the fluctuations in the foreign currency exchange market.
This may work in your favour when the pound is strong but - as was seen after the 2016 Brexit vote - sterling can plummet.
Advantages of investing in a holiday home
Aside from the obvious attractions of being able to use your own holiday home in a desirable location, there may also be very real financial advantages to investing in a holiday let in the UK, with rental returns that have the potential to outstrip buy to let income.
Will there be a holiday-let mortgage boom?
- “It’s hard to measure as the sector is finding its feet after the stamp duty rise, but we haven’t yet seen a boom or a noticeable increase in lenders in this sector.
“It’s early days to say whether there’s a shift towards holiday lets, but lenders have shown that they’re prepared to design products in areas where they see demand.”
David Hollingworth, L&C, August 2016
Many will also hope for long-term returns through a growth in property price; this can never be guaranteed, of course, but historical performance has been very strong and the fact that holiday homes are likely to be in attractive locations should work in the owner’s favour.
One of the major factors fuelling the buy-to-let boom seen in the UK since 1996 was the tax advantages offered to landlords, but the government is introducing legislation to reduce these advantages in 2017, a process set to be completed in 2021.
However, the tax law changes affecting buy-to-let haven’t been applied to holiday homes, which has fuelled predictions of huge growth in the holiday let mortgage market in years to come.
To qualify for holiday let tax advantages, the property must be furnished, available for letting for 210 days a year, and actually let for 105 days.
All holiday home owners can then set expenses - including mortgage interest and wear and tear - against their rental income when it comes to an assessment of their income tax.
The holiday let is treated in the same way as other trading businesses, meaning that losses can be carried forward and offset against future losses.
When a property is sold, there are also potential capital gains tax benefits through entrepreneurs’ relief. Business property inheritance tax relief is another possible benefit.
Disadvantages of investing in holiday homes
The April 2016 introduction of a 3% stamp duty surcharge on additional homes applies to holiday homes, so this drives up the cost of purchasing a property and makes resale less attractive.
While the historical record of property prices and rental levels in the UK suggests upwards growth, it must always be remembered that this is no guarantee of future performance.
Prices and rents can go down, mortgage rates can go up, and if an investor has stretched themselves - particularly by gearing their house purchase with an interest-only mortgage - they could be left badly exposed.
If the property is overseas, the possible risks multiply and will include fluctuations in currency exchange rates. Overseas investors must also consider the tax situation relevant to whichever country they buy in.
All property owners need to consider the myriad costs that can be associated with buying, owning and selling, including:
- Mortgage fees
- Maintenance bills
- Periods without rent
- Problem renters who may cause damage or not pay the fees
Unlike in a regular buy-to-let, a holiday-let owner will have to pay council tax and probably utility and broadband bills. They will also need to ensure their insurance includes public liability cover, and it’s likely that the furnishings will need to be of a high standard.
The property will need cleaning and linen changes when guests leave, plus a process for checking in and key handover. If such activities are done by a third-party agent, the fees can be significant.
Although the tax advantages have been noted, remember that money from holiday lets is income that will need to be declared to HMRC.
In the case of overseas holiday homes, you may have to pay income tax in both the country where the property is based and in the UK.
Alternatives to holiday home mortgages
If you have the funds, the obvious alternative to a holiday home mortgage is to use your savings.
Should you be able to part-fund the property, you may also want to consider a personal loan. This is typically available for up to £25,000, but it may be possible to take out more. Peer-to-peer loans are also worth looking into.
If you have equity in your main property, or if you own it mortgage-free, then it’s worth thinking about a secured loan or second-charge mortgage, or remortgaging to raise funds for your holiday home.
“L&C can help you with releasing equity from a UK property to purchase overseas,” said Hollingworth. “This will involve a standard look at affordability and the level of equity. Some people prefer borrowing in sterling because of foreign exchange rate fluctuations which can, of course, either work for or against them.”
This is never a decision to take lightly, but you can read more about some of the things to consider in our article on remortgaging to buy a rental property.
By Sean Davies