How can I finance the purchase of a holiday home?
Buying any property is likely to represent a considerable investment and one for which cash for an outright purchase would be a rare thing indeed.
That means borrowing funds by way of a mortgage – a loan which is secured against the property itself which may be at risk if you fail to maintain the mortgage repayments secured on it.
So, the mortgage is the same as when I bought my home?
Holiday home finance differs from the standard type of mortgage you might have arranged when buying the home you are living in.
A holiday let mortgage recognises – and its terms and conditions reflect – that the property is going to be used mainly as a source of income from the rents paid by short-term rentals by holiday makers and other visitors, but may also be used from time to time by you and your family for you own enjoyment and recreation.
Is holiday home finance the same as a buy to let mortgage?
No, a holiday home mortgage is also different to a buy to let mortgage – even though some press reports have suggested that investment in a holiday home may be “the new buy to let”.
Although there are going to be tenants in your holiday property, these are typically for much shorter stays, of just days or two or three weeks. The buy to let landlord, on the other hand, relies on a rental income from much longer term tenancies – typically on an assured shorthold basis.
In some ways, therefore, you might see a holiday let mortgage as a hybrid between a standard home mortgage and a buy to let mortgage – a specialist type of loan, which you might want to ask a specialist holiday let mortgage broker arrange on your behalf.
What if I choose the wrong type of mortgage?
It is important to let any potential mortgage lender know your exact intentions for the property you want to buy. If you want to use the loan to invest in holiday let property, therefore, make sure that this is clearly understood by any lender.
If you mislead a lender – because you believe a different kind of mortgage might be found on more favourable terms or at a more competitive rate of interest, for example – beware that you may be asked to immediately repay the loan, or still worse, be held responsible for mortgage fraud.
How much can I borrow?
How much you are able to borrow for a holiday let mortgage varies, of course, from one lender to another.
As an illustration, however, a potential mortgage lender might require that:
- you already own – or are buying – your own home;
- you have a deposit equivalent to between 25% and 40% of the purchase price;
- the holiday let’s rental income has been assessed at a level equivalent to between 120% and 145% of your monthly mortgage repayments; and
- you have a personal income of at least £20,000 a year.
To help raise the deposit, you might consider raising the funds by way of a further mortgage on your current home.