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Holiday Cottage Mortgages

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 9th July 2019* | Published: 10th May 2019

Changing tax laws and the rise of sites like Airbnb have lead to growth in the traditional industry of holiday lets. In this piece, you’ll learn about how holiday letting and holiday cottage mortgages work.

Considering buying a holiday cottage? Drop us a line and we’ll put you in touch with an expert advisor who can advise you based on your personal circumstances.

Here’s what you’ll learn in this article

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What are holiday cottage mortgages?

‘Holiday cottage mortgage’ is a general term that some lenders might use to describe a home loan for the purchase of a cottage that the borrower either intends to use as a holiday home for personal use or let it out to holidaymakers to generate rental income.

The specific product you would need in this situation will depend on a number of factors. For instance, if you wish to buy a cottage solely for personal holiday use, taking out a second home mortgage on the property would suffice, but a specialist holiday let mortgage may be required if your plan is to rent the cottage out to other people.

Things can be less straightforward if the holiday cottage you’ve got your eye on is located abroad. In these cases, an overseas mortgage would be called for.

What is a holiday let mortgage? How is it different from buy to let?

The majority of conventional rental agreements come under what is called an Assured Shorthold Tenancy (AST). This is the typical legal for anyone any rented residence, and protects the rights of the tenant in particular.

Holiday lets follow a different set of rules. Whereas the minimum term of an AST is 6 months, there is no minimum for a holiday let - they are for people who are ‘visiting', not ‘living’.

As such, holiday lets are treated very differently in legal terms. Trying to use a BTL mortgage for holiday let can constitute mortgage fraud, and is illegal.

Another reason why holiday lets are different comes down to the variability of cash flow. BTL lenders expect a certain amount of variability in your income, but are not used to the huge fluctuations and seasonality that characterises the holiday let market. You often need a specialist lender, like the ones we work with.

Can I get a holiday cottage mortgage?

You can - if you’re going down the second home mortgage route, you’ll find that your cottage mortgage is assessed in much the same way as your original residential agreement, though eligibility checks may be more stringent since you already have a home loan to service.

If you’re planning to rent the cottage out to holidaymakers, take note that there are fewer lenders in the holiday let mortgage space, so it may be more difficult to find a deal.

The two main factors that determine whether a lender will make you an offer are…

1. The property itself

2. Your personal profile

We’ll give you an outline of how both work below.

The property itself: The location and construction

The materials used to construct the property will help (or hinder) your mortgage search.

If it has any elements of non-standard construction (such as a thatched roof or steel frame), many lenders will be put off, or offer less favourable terms. In such instances, you may need to consider a more specialised lender.

The location will also help to determine rental demand - which is something a lender will want evidence of. Many prospective mortgage providers will want to see that the projected rental income meets at least 125-130% of your mortgage payments. They’ll also want you to buy in a location with some resale demand too.

There are a number of related issues that are far more common in rural properties - such as public footpaths and right of way. Not to worry - a full RICS survey will help you spot such issues early on.

Whether the property requires much work is another factor - we make the assumption that the property you’re buying is habitable and not in need of significant renovation or conversion for holiday let use.

If you’re looking to convert another property into a holiday let, you may want to look at our article on bridging finance here and our guide to development finance here. There may also be other options for financing a project of this nature - make an enquiry to find out what they are.

The price of the property

Many lenders set upper caps on how much they’ll lend - which means that when you start looking at particularly expensive cottages, you may need to find a specialised private lender - or to consider the commercial route.

The advisors we work with have access to the whole of the market and may very well be able to help you find the perfect lender.

Your personal profile

To a certain extent, your lifestyle and expenses come into your risk profile.

Lenders will want to see that you’d be able to cover the cost of your mortgage - even if interest rates were to rise, or you had a particularly long void period. As such, they’ll be more inclined to lend to you if you can cut down on your outgoings.

How many other properties you have is another factor. If you’re already paying a mortgage on another house, or are what some banks would classify a ‘portfolio landlord’ - lenders may see you as more of a risk. You may need to find a more specialised lender if this is the case.

Your deposit and LTV

The larger the deposit you’re able to put down (and the lower the LTV) - the more likely a lender will want to work with you. Find out guide to mortgage deposits here.

Your credit history

Better credit positions you as less of a liability in the lender’s eye, but some bad credit in your history is certainly not a deal breaker. The advisors we work with regularly help people with bad credit to find the right financing.

If you want to know more about getting a mortgage with credit issues - take a look at our guide for bad credit mortgages or get in touch.

Your income and income sources

Most lenders like people who earn salaries and who get paid through PAYE. Anything else is deemed as ‘non-standard’ and may restrict your options.

That doesn’t mean that there are no options for those who make much of their money as business owners, or from self-employment - it just means you may need to find a more specialist lender. You can read more about mortgage income requirements here.

Whether you have any collateral

If you have other assets that can be secured your mortgage, lenders may be likely to offer to you - or to give you a better rate. As is probably obvious - this is not something to be taken lightly.

Is buying a cottage a good investment?

That largely depends on the individual cottage in question! Here at OMA, we help people to get the finance they need. We’re not investment advisors and we don’t offer advice on the subject.

However, here are some things you may want to bear in mind if you’re considering investing in a holiday let cottage.

Are you investing for cashflow or capital appreciation?

This will largely help to determine the kind of strategy you pursue.

If you’re investing for cash-flow - you’ll need to be sure that the rental demand in the area is significant enough to cover your mortgage and any other costs. Prospective lenders will care about this as well.

If you’re investing for capital appreciation, you’ll want to look choose an area in which you think there’s a good reason for the property’s value to rise over time. This could be from buying a more run down property and bringing it up to spec, or buying in an up and coming area.

Secondarily, you may still want to look at cashflow. Renting out the cottage occasionally to cover some of its running costs will allow you to make some money on the property when you are not using it yourself - though it’s worth considering that the best times to stay at your cottage (i.e. the peak season) are also the times you’re most likely to let it out.

Are there such a thing as 'buy to let' holiday cottages?

Technically no.  The majority of conventional buy to let rental agreements come under what is called an Assured Shorthold Tenancy (AST). This is the typical legal arrangement for any rental agreement, and protects the rights of the tenant in particular.

Holiday lets follow a different set of rules. Whereas the minimum term of an AST is 6 months, there is no minimum for a holiday let - they are for people who are ‘visiting', not ‘living’.

As such, holiday lets are treated very differently in legal terms. Trying to use a BTL mortgage for holiday let can constitute mortgage fraud, and is illegal.

Can I get a mortgage for a holiday cottage business?

If you’ve set up a business with the intention of letting out holiday cottages through it, the advisors we work with could potentially arrange a number of specialist products for you.

You can read more about mortgages for limited companies, find our in-depth guide to commercial mortgages here, and don’t forget to check out the section titled ‘Is buying a cottage a good investment?’ in this article for additional information on cottages for business purposes.

Furthermore, you can make an enquiry and the advisors we work with will talk you through holiday mortgages for businesses and introduce you to the specialist lenders who offer them.

Are holiday cottage mortgage rates any different to other property types?

Yes, when compared to residential mortgages, holiday let rates are often more expensive. Lenders typically offer a lower LTV and usually impose stricter affordability tests that take into account a realistic estimation of rental yield.

Holiday let rates also tend to be more expensive than conventional buy to let mortgage rates - this is because the financing is quite specialised, and as a result, the lender pool is smaller.

Does the location of the cottage affect whether I can get a mortgage?

Yes. For example, you'd probably find that buying a holiday cottage in Scotland is easier than buying a holiday cottage in France. Conveyancing laws can vary enormously from country to country.

Even within the UK, you'll likely find it easier to get financing in areas which have evidence of stronger demand for short stays, such as the Lake District or Cornwall.

The advisors we work with have experience arranging holiday let cottage mortgages across the UK and even abroad. So whether you’re looking for one in Wales or one in France, make an enquiry to get the right advice.

Should I use equity release to buy a holiday let cottage?

Equity release is not something to be taken lightly. Many people would deem using equity release to purchase an investment property as particularly risky - as many equity release schemes were not designed for investment purposes.

If you are considering equity release as a means to finance a holiday let cottage, you may want to consider a scheme with a ‘reserve facility’ (which allows you to pay interest only on as much as you need).

You may also want to look at arrangements that allow you to pay down the principal (as many equity release plans are interest only - being paid off upon your passing, or the sale of your house).

This is a big question. For more of an idea about how equity release works -take a look at our guide to equity release schemes, or get in touch for some expert, friendly advice from one of the brokers we work with.

Need help financing a holiday let cottage? Speak to the experts

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 9th July 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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