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A quick guide to holiday let mortgages

A holiday home may allow you to enjoy several benefits at the same time.

With a little forethought and care you might turn a well-situated second home into a money-spinning holiday let – but you still own a home which you and your family may also use for your own holidays when there are no short-term tenants to accommodate.

Finding holiday let mortgages

Most investors in holiday let homes are likely to want to borrow funds to make the purchase. The form of borrowing comes in the shape of holiday let mortgages.

The immediate problem you are likely to encounter however, is that suitable lenders are few and far between – with names you might not be familiar with at all.

That is why you might want to consult a specialist holiday let mortgage broker, with the expertise, experience and inside knowledge of the market to identify those lenders most likely to meet your particular needs and requirements – and advance a loan at a favourable rate of interest.

Choosing the appropriate mortgage

A specialist broker is likely to stress the importance of choosing a purpose designed holiday let mortgage – rather than say, the type of residential mortgage that a home owner occupier might want or a buy to let mortgage that a landlord might be after.

Holiday let mortgages are different to either of these and your lender is advancing the loan on the clear understanding of your intended purpose for the holiday home you want to let. That purpose forms part of the lender’s assessment of affordability of the mortgage and the amount that might be advanced.

Assessing how much you can borrow

One of the principal measures used by holiday let mortgage lenders is the expected rental income during the course of the year, compared to the amount you need to pay in mortgage instalments over that period of time.

The percentage of rental income to mortgage repayments varies from one lender to another, but coverage ratios are likely to be in the range of 145% to 150%.

When calculating the profitability of your holiday let investment, you might want to bear in mind that, provided you meet certain formal definitions of a “furnished holiday let”, you enjoy valuable tax benefits and allowances – benefits and allowances that have been gradually stripped away from full-time buy to let landlords.

To secure a holiday let mortgage, you are also going to need to find the capital for a deposit – typically, around 25% to 40% or the purchase price of the property. Clearly, this may pose its own difficulties, but in certain cases, you may be able to borrow the required deposit against security of the equity you already own in your main home.

Many lenders also set a minimum annual income that needs to be met by mortgage applicants. However, this may be a relatively modest level of income, say, £20,000 a year.

Some, but not all holiday let mortgage lenders may also make it a condition that you already own your own home – or have a mortgage to help you buy it – before advancing a loan for the purchase of a holiday let.