For many people, the idea of owning a holiday cottage sounds like paradise: a cosy little place to get away from things at the weekend, holidays with the family and the advantage of hiring it out as a holiday let in between to help pay the mortgage. While many people do enjoy the benefits of turning a second home into a holiday let, there are a few things that you need to be aware of and even a few pitfalls to avoid.
First off, a holiday property cannot be purchased or remortgaged with a normal residential mortgage – even if you intend to live there yourself for long periods. Lenders might offer you a buy-to-let product but more likely you will have to obtain a specialist holiday let product. This is because of the increased risk that a ‘rental’ property represents to the lender. For example, how will the mortgage be paid if you struggle to find people who want to stay in your property? Will you accept all male or all female parties to book the property (together with the attendant risk of raucous hen nights and stag dos threatening to upset not only the neighbours but the local council too).
If you intend to use an existing second home as a holiday let then don’t be tempted to simply not tell your lender about the change in use. Mortgage companies have access to the internet too and they will be completely within their rights to demand full repayment of your residential mortgage when they find out you’ve been renting the property out to holidaymakers. In such circumstances, you might well also find your name is placed on an official fraud prevention blacklist – making applications for any form of finance in the future highly difficult – and leaves you liable to prosecution for fraud too.
Instead, be upfront and open with mortgage lenders from the outset. This means doing your homework on questions about how you intend to finance the out of season periods as well as your predicted clientele.
As holiday home mortgages are rather specialised, your choice may be a little limited in terms of lenders, but the good news is that there is still a reasonable selection of mortgage types for you to choose from, including fixed rate, discounted variable and variable. However, for the same reasons as outlined above, it’s likely that holiday home mortgages carry a slightly higher interest rate than a normal residential product.
As it’s very probable that your new holiday cottage is a ‘second’ home, you may find that you will be offered an ‘interest only’ mortgage, where you only pay the monthly interest on the loan with the capital balance being repayable when you sell the property or at the end of the term. For repayment mortgages, you may also find that the lender insists on a shorter term than the usual 25-30 years.
Typically, you’ll also need to have a larger deposit than for a residential mortgage. This tends to be around 25% of the purchase price as a minimum.
Foreign holiday home purchases can be far more complex. The type and availability of rental mortgage products depend heavily on the country you are buying in. In terms of providers, it is likely to be very hard to find a UK based lender who will advance you a mortgage on an overseas property – however, if your lender has branches in the country you intend to buy in then it may be possible to arrange finance through these. In most cases though, you’ll need a bank or financial organisation based in the country required.
Foreign lenders may well have different requirements than their UK counterparts, as well as insisting that prepurchase checks, such as valuation, or legal processes be carried out by agents in their home country.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
Sadly, no. Even where the mobile home is in permanent residence on a site, you will not be able to get a mortgage for this type of property. However, a lender may be able to arrange a secured or unsecured loan to finance your purchase, providing you and the mobile home meet their lending criteria.
As holiday cottages are often ‘second’ homes in the eyes of mortgage lenders, you should be prepared for affordability checks to be much stricter. If you are still paying a mortgage on your existing property then the lender will want to see convincing evidence that you can comfortably afford payments on both. While you may well intend to rent the property out (either privately or through a holiday cottage company) you must anticipate that there will be periods where the holiday property is vacant and not generating any money. You must be able to demonstrate how you will cope with repayments during these periods.
Insurance will also be a necessity: both for the buildings and contents. Again, with the new property being rented out insurers will look at these are higher risks so premiums can be higher than for your ordinary home. In these circumstances it’s therefore wise to shop around to get the best deal – and again, be honest. Insurers will certainly carry out checks in the event of any claim and are within their rights to void the policy if you have not declared the fact that the property is a holiday let.
Those considering setting up a holiday let business should consult a tax specialist to be certain of their tax arrangements.
Although you can approach individual banks and building societies, this can be a lengthy and time-consuming process. Instead, your best bet is to use the services of a reputable mortgage broker who will have the specialist knowledge and contacts to find you the best deals available. A mortgage broker can pull together the top deals and present you with a number of financing options to choose from.
Moneyfacts.co.uk has chosen Mortgage Advice Bureau (MAB) as our preferred broker when it comes to providing mortgage advice. Speak to a mortgage broker about the best holiday let mortgages.
The majority of lenders will insist on the holiday let being fully furnished so make sure you have included the costs of furnishings and sundries (such as kitchen equipment, cutlery and even towels) in your affordability calculations.
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