Holiday let vs buy to let: FAQs about the borrower

Holiday let is an area of the mortgage market that’s becoming ever more appealing to property investors. There are some key differences between mainstream buy to let and holiday let which are important for brokers and their clients to understand. Let’s take a look at some of the big contrasts when it comes to the person - or entity – taking out the holiday let mortgage.

What sort of mortgage do I need for a holiday let?

The first thing to bear in mind here is that there is a swathe of specialist holiday let mortgage products, designed for borrowers looking to invest in this type of property rather than a traditional buy to let. This is an area of the mortgage market that has seen enormous growth, with the number of deals open to borrowers trebling since August 2020 according to figures from Moneyfacts. As mentioned, there are some important differences between holiday let and buy to let mortgages which brokers should bear in mind. One such example is affordability, and how this is calculated.

How is affordability for a holiday let mortgage calculated?

With any mortgage, affordability is a big consideration for a mortgage lender. With holiday lets, affordability takes on an even greater significance, due to the often fluctuating and seasonal nature of the income a landlord receives. For example, a seaside holiday let may be hugely in demand, and therefore generates greater rental income during the warmer months, but less-so during the winter when it may be less sought after, and perhaps even empty for weeks of the year. This is rather different from a regular buy-to-let mortgage, where so long as the property is occupied, the landlord will enjoy the same rental income month after month.

Lenders want to take a rounded view when working out what rental income a holiday let is likely to generate, and in turn, what the investor can borrow. This means taking an average figure for not just the high seasons but also medium and low seasons for the property and its location.

Lenders will then calculate an average based on these figures for what the investor is likely to receive and use this to determine what they are willing to lend the investor on a holiday let basis. At The Cumberland, we take the gross annual income as projected by the holiday letting agent and deduct 20% for agent fees to arrive at the net figure. This is the figure we would use to assess serviceability of the mortgage.

If the landlord is refinancing an existing holiday let loan, then they can use their own business records to provide these figures. If the borrower is looking to purchase a new holiday let property, they can get a local letting agency to provide the details - some lenders employ lists of approved agents whose figures they are happy to accept.

What if the rental income from the holiday let isn’t enough?

Top slicing has become a common feature of the buy-to-let market in recent years, where a borrower’s personal income is included in affordability calculations on occasions where the rental income from an investment property isn’t going to be sufficient to cover the mortgage repayments. This is also a feature of holiday let mortgages. Whether or not it is required, it will impact the products your clients will qualify for. At The Cumberland, we look for annual net rental income as projected by the holiday letting agent, to be worth at least 125% of the annual mortgage interest at the product fixed rate (for five-year fixed rates deals), or at least 125% of the annual mortgage interest at a rate of 5.6% for standard variable rate and our 2-year fixed rate product.

If these criteria can be met, the borrower may qualify for our standard range of products. Background income can be used to top-slice should this threshold not be met, though this will mean that the client will be limited to The Cumberland’s non-standard products.

How much can a client borrow with a holiday let mortgage?

As with any form of mortgage, one of the first questions brokers will be faced with from clients is ’how much can I borrow?’ In much the same way as with a regular buy to let mortgage, lenders will have their own maximum and minimum loan sizes set out in their lending criteria. For example, at The Cumberland, our minimum loan size for a holiday let mortgage is £75,000.00. With both our standard and non-standard products, we will consider holiday let loans worth up to £2m but can consider loan sizes in excess of this figure based on bespoke pricing. If a client is looking to borrow a larger sum, then it’s worth having a chat with our team to see what options may be available to them.

Are holiday let mortgages available for limited company borrowers?

Over the last few years, the way that landlords invest in property has changed somewhat, with a significant increase in the number of investors opting to own property through a limited company structure rather than in their own name. This is very much the case within the holiday let market too, with clients not only able to invest as individuals, but also as partnerships and through Special Purchase Vehicles.

Importantly, within regular buy to let, opting to purchase through a limited company can restrict the products open to a client, or open them up to higher interest rates than if they purchased in their own name. This isn’t the case at The Cumberland though; so long as a borrower qualifies for our standard range of products then they can purchase as an individual, partnership or limited company without any knock-on effect on the rates involved. Standard products are also open to both portfolio and non-portfolio landlords purchasing holiday let properties.

Are holiday let mortgages available to first-time buyers?

Investing in a regular buy to let as a first-time buyer is possible, but brokers will know that it’s far from straightforward. With potential buyers already having a more limited product choice, they can also find that their lack of a credit record makes them unattractive to lenders. Being a first-time buyer is not necessarily an obstacle with a holiday let mortgage, however. At The Cumberland, borrowers who do not own a residential property can still borrow through our non-standard range.

Decisions made by real people, not robots

Finally, it’s worth highlighting the more personal approach taken to assessing a potential holiday let proposal, compared with a regular buy to let mortgage. Many lenders rely on their systems or an algorithm to assess buy-to-let application, enforcing rigid rules and criteria. This isn’t how it works with holiday let mortgages, particularly at The Cumberland, where all mortgage decisions are conducted by real people. This way, our underwriters get a real grasp of an individual’s case where other lenders may shy away, especially with complex cases. We will consider an individual’s income vs. their commitments and take into consideration other assets and liabilities.