Lending criteria varies between lenders, so the first step will be identifying what you need from your mortgage and finding out what the lenders can offer.
Think about the following:
Where do you wish to purchase a holiday let property?
Some lenders only offer mortgages within England and Wales, for example, so if you’re purchasing in Scotland, that’s something you will need to check. At the Cumberland we offer mortgages throughout England, Wales and Scotland, and selected UK islands too.
What size of deposit do you have?
Typically, for a holiday let mortgage, 75% will be the maximum LTV. Some lenders have a lower maximum LTV, so if you’re working with a 25% deposit, check this criteria early on (usually available on their website).
How do you plan on using the property?
To qualify for a holiday let mortgage, your property will need to meet the Furnished Holiday Letting criteria set out by HMRC. This set of guidelines covers various criteria that you need to meet, in order to enjoy the tax benefits that come with a holiday let property.
For example, your property must be available for letting as furnished holiday accommodation for at least 210 days in the year – any time that you or family and friends stay in the property (unless they’re full paying guests) does not count as part of this 210 days.
Letting should also be predominantly short term - the total of all lettings that exceed 31 continuous days shouldn’t be more than 155 days.
How much do you want to borrow?
Lenders will have a minimum and maximum loan size, so once you’ve established roughly how much you’ll want to borrow, double check that it fits in with the parameters offered by a range of lenders. Unless it’s a small or very large amount, chances are you’ll have no problems here.
Is the property leasehold?
Your lender may ask that there is a certain amount of time left on the lease, both at the start of the mortgage and at maturity, so this is important to check when you’re viewing properties.
Applying for a holiday let mortgage
As part of the application process, lenders will assess affordability. To help them make an informed decision, they’ll be looking for information such as the details of present income and expenditure for the property.
For example, at The Cumberland, if the property is an established holiday let, existing trading figures in the form of certified accounts, a letter from the holiday letting agent confirming gross annual income for the last 2 years, or an SA100 tax document will all be accepted.
If you’re purchasing a property that hasn’t been a holiday let before, we’d ask for a projection from an experienced holiday letting agent. Not all lenders will accept projected figures though, so look out for this when doing your research.
At The Cumberland, to help us assess each application we’ll also ask for: proof of income or pension income, recent bank statements, and proof of deposit.
Will you buy in your personal name or through a limited company? Company structures have different tax advantages, so it's worth assessing your options. At The Cumberland we lend to individuals, partnerships and limited companies as well as trading companies, LLPs and trusts. Be aware that not all lenders accept limited companies.
Fixed versus variable rate
Consider whether a fixed rate or variable rate mortgage would suit you better. There is no universal ‘best’ option here - It really depends on your personal circumstances and the degree to which you require certainty with your mortgage payments.
The property will be valued for mortgage purposes and it's likely you'll pay for the valuation - however this valuation will be addressed to the lender and you will be provided with a copy of the report. The valuation is a crucial part of the process as it covers some important elements:
The valuer is likely to pass comment on the suitability for holiday letting and may indicate some low, mid and high season weekly rates.
The valuer will provide a general comment on the construction of the property and any obvious matters that need to be drawn to the lender's and your attention.
Once the valuation has been received and the property is assessed as satisfactory for lending purposes, a mortgage offer will be produced and sent to you and your solicitor.
Your solicitor will carry out searches against the property and liaise with the seller's solicitors regarding the fine detail of the sale contract and the completion date.
When the completion date is given, your solicitor will request the funds from your lender and shortly after you will own your own holiday let property. How exciting!
Taking the first step
Once you have established what you’re looking for, it is a good idea to speak to a lender and ask any questions you may have. Often you can do this from the comfort of your own home, via a telephone appointment.
From talking to a lender, you will be able to understand:
How much you can borrow.
What’s needed to satisfy the lender’s criteria and progress with an application.
The indicative interest rate you will be paying and likely monthly payments.
The cost of the property valuation.
An outline of the process and likely timescales.
For more information about holiday let mortgages, click here.
*Grant Seaton is senior business lending manager at The Cumberland