Holiday Let Mortgages explained

In recent years, short-let platforms such as Booking.com and Airbnb, which act as intermediaries in booking accommodation, have become particularly popular. They enable property owners to rent out their apartments and houses for short periods, usually from a few days to two weeks. The growing popularity of such platforms and the number of people offering their apartments to tourists means that this activity is profitable. So maybe it’s a good investment idea? In this post, we will describe what Holiday Let mortgages are all about.

Short-term rentals have become an alternative to renting your property to permanent tenants for several months or years. It is mainly focused on tourists visiting a given city who need accommodation. This solution has become a huge competitor to hotels, which for years were the most popular choice for visitors – but when the option of cheap apartments or houses for exclusive use appeared, many people were very eager to take advantage of it.

It turned out that short-term rentals can be more profitable than long-term rentals, mainly due to generally higher daily rates and their flexibility, which has a positive effect during the tourist season. Of course, this is no guarantee of high income – short-term rentals involve much more work with the property and higher operating costs. You certainly have to spend more time serving guests and money on frequent cleaning of the apartment and washing bed linen and towels. However, there are ways to optimize this, so with the right knowledge and practices, short-term rentals can be a profitable investment strategy that generates high returns.

Investment mortgage for short-term rental property

There are many banks and building societies on the market that offer investment loans for properties intended for short-term rental. Such products are usually called Holiday Let Mortgages or Short-term Mortgages. This is a variation of a Buy-to-Let loan, specifically geared towards short-term rentals. Please note that short-term rental of a property purchased with a classic Buy-to-Let loan is a breach of the terms of the agreement, which can lead to serious consequences. In this situation, consent to let will not work either - such permission is only granted for long-term rentals.

Due to the more complex nature of managing this kind of investment, banks consider short-term rentals to be riskier, which often results in less favourable mortgage terms. In addition to conducting a traditional affordability assessment, the bank will also analyse your investment in terms of expected returns and potential risks. The projected rental income is a very important aspect. The bank will likely ask you for data showing the annual income from other properties of this type and the occupancy rate in a given location. You can obtain this data from services such as AirDNA or from local agents or owners of short-term rental properties.

On this basis, the bank will conduct an analysis, known as the rental cover ratio, which will show whether the rental income will be able to cover the loan interest with an adequate margin (the required value is usually around 125%–145%). The second very important aspect is signing a personal guarantee – in the case of holiday let mortgages, the presence of a guarantor will most likely be mandatory. A guarantor is a person who, in the event of any problems with loan repayment, is liable with their own assets. This means that an assessment of your individual financial situation will also be carried out. Although there are cases where a guarantor is not necessary, this is very rare – usually only LTD companies whose business is investing in real estate and which have a large portfolio and an extensive, positive credit history are eligible.

It is worth bearing in mind that holiday let loans are generally more expensive than regular buy-to-let loans. However, this can be offset by a high deposit, a good financial situation and credit score, and extensive experience as a landlord.

Rental licence

If you are considering a Holiday Let mortgage, you must remember that some councils require a special licence. If you rent out a property without one, you may face a heavy fine. As a rule, you apply for a licence after purchasing the property, but it is worth doing your research before you take out a mortgage. It may be that the local council in a given region is not currently issuing licences, e.g. due to the high number of properties for rent in the area or complaints from residents. Before applying for a mortgage, be sure to find out what the situation is in the region where you plan to purchase the property.

Insurance policy for holiday let properties

It is also worth remembering that when granting a holiday let mortgage, your lender will require additional insurance. Building insurance is an absolute prerequisite for any mortgage agreement and protects the property against events such as fire, flooding, vandalism, etc. In addition, if the property is to be rented out, you will need a special policy called Holiday Let Insurance or Landlord Insurance. This extends the cover to include general liability towards guests, protection of property against theft or damage, and often loss of rental income in situations where you are unable to rent out the property for unforeseen reasons (these often coincide with situations covered by standard building insurance, such as fire, flooding, etc.). The bank will check that both policies are in place and verify that they comply with the loan agreement.

What are my options if I want to change the rental model to long-term?

After obtaining a holiday let mortgage, many situations may arise during the rental of the property that will make it difficult to run the business. Of course, unforeseen events can happen to anyone and affect any investment, but short-term rentals are characterised by the complexity of investment management and many variables. In addition to owning the property and dealing with repairs, there is also the matter of contacting and settling accounts with customers and frequent cleaning of the flat (or concluding a contract with a cleaning company). Reconciling these activities with everyday life may not be easy, especially if you live in a different city on a daily basis.

Fortunately, banks are aware of this and are prepared for situations where the borrower wants to convert a holiday let mortgage into a standard buy-to-let mortgage. Some institutions are even willing to agree to this without remortgaging, under the same mortgage agreement! Although tempting due to the low amount of paperwork involved, this solution may not be the most cost-effective. Remember that holiday let loans are usually more expensive than traditional BTL loans, so considering a remortgage may be a good idea.

In a critical situation, you can also simply sell the property – this is a universal solution and applies to most mortgages, not only holiday let type. If someone decides to sell the property and repay the loan from the proceeds, they simply terminate the loan agreement early and close the liability. In this case, the investor safely frees themselves from debt under two conditions:

• The value of the property has not fallen so much that it is less than the capital to be repaid – this phenomenon is called negative equity and means that the proceeds from the sale of the property are not sufficient to fully cover the lender’s debt and the borrower has to pay extra out of their own pocket;

• They do not have to pay a high ERC – Early Repayment Charge is an additional fee charged when the loan is repaid early, which usually expires with the promotional period. If the property is to be sold, for example, after 2 years, and the fixed interest rate period lasts 3 years, the investor will be required to pay the fee.

Summary

Obtaining a Holiday Let mortgage is possible and often practised, but it requires proper preparation and strategy. You need to be aware of the responsibilities that come with being a holiday rental landlord and how to reconcile them with your everyday life. That is why banks look favourably on people with experience in this field. You also need to remember about the appropriate licence and insurance – not having them may cause a conflict between you and the bank or law enforcement authorities.