Damage deposits are a major factor when considering turning your second home into a holiday let. Damage to properties...
If you’re thinking about applying for a holiday let mortgage, you’ll come across many different factors that can make applying for a mortgage difficult. But amongst some of the challenges that you will face on your property journey, one of the toughest obstacles to tackle are holiday let mortgage deposits.
Holiday let mortgage deposits can sometimes scare new owners from acquiring a property, but it helps to have a guide to buying a holiday let, particularly around mortgages and deposits, before you get started.
When you’re thinking about investing in a holiday property, the mortgage deposit is the first and arguably the biggest hurdle that property owners are challenged with.
For a holiday let mortgage, you will need to have a deposit of at least 25% in relation to the value of the property. That means if the house you’re looking to purchase is worth £400,000, the deposit you will need is going to be a minimum of £100,000.
Much like regular property mortgages, the amount that you will need for your holiday let mortgage deposit depends entirely on the properties worth, location and your income. But unlike regular holiday let mortgages, you will be required to put down a slightly larger deposit percentage.
Alongside a greater deposit there are many other factors that need to be considered when thinking of your holiday let mortgage deposit.
If you have already been looking around holiday let mortgages and deposits, a term you may have already come across is ‘LTV’ which means ‘loan-to-value’.
An LTV is the amount that the provider is willing to loan to you in relation to the value of the property.
Holiday let mortgage lenders will typically provide a maximum LTV of around 80%, with the lowest LTV being at 60%. If your LTV is towards the higher end of the scale, you may face a higher fixed interest rate too.
With this in mind, the lower your LTV is, the better for you and your monthly mortgage repayments.
For example, if you assume that the property value is £300,000, and you put a deposit down of 20% (£60,000), you will be looking at the maximum LTV of 80%.
The big deposit costs that come with applying for a holiday let mortgage can put most property owners off. Not only that, high interest rates are also something that scares new owners away.
If you’re currently pondering over the affordability of a holiday let mortgage deposit, remember to keep some finances aside that you can put towards your other requirements too.
Stamp Duty: As is the case with regular properties, you will need to pay a stamp duty cost of up to 3%.
Additional Fees: You will need to consider application, broker and legal fees that come with applying for a property mortgage.
Furnishing the Property: It’s important to ensure that your guests have the best level of satisfaction when staying at your property. Providing furnishing, utilities and utensils will help make your property a homely place to visit.
Insurance: Holiday let insurance is crucial when letting out your property. As guests come and go, you may encounter an accident or two over the years.
Did you know: If your property is fully furnished, your property will qualify as a furnished property let, giving you some capital gains tax reliefs. You can find out more about holiday let taxes in our guide to holiday let business rates and council tax.
Unlike conventional mortgages, holiday let mortgages are provided by smaller building societies rather than big high street banks.
The deal that these providers are willing to offer are more flexible and can vary, but typically you will find they offer 2-5 year fixed rate deals.
Top tip: Make sure you ask around for the best deal that works for you. With many more people looking around at holiday let mortgages, some societies might be a little more competitive with their offerings.
Now you know what it is needed for your deposit, you need to start thinking about what mortgage lenders are going to need from you.
Every mortgage lender will ask for evidence to show that you have the deposit money in place, but depending on what lender you are going with, you may require a different form of evidence.
If you’ve had your heart set on getting yourself into the world of holiday home letting, you might have some savings already stored away. If you are just getting started, speak to your banking provider about what ISA services they can provide to help you build savings.
Lenders will ask to check your savings account to ensure that there hasn’t been a sudden implementation of cash into your account and that you have a steady income over a 3 month period.
The reason behind checking your personal savings is to ensure that you can afford your repayments and that you are not involved in any money laundering.
If you intend to pay for the deposit with a lump sum of money that you are going to acquire through inheritance, the mortgage providers may ask to see proof of this as well.
To provide proof of inheritance when acquiring a mortgage, simply ask your solicitor for documentation proving the permitted inheritance. This way you will not be suspected of laundering.
For those lucky few that have friends or family willing to help with the deposit, you will need to also provide evidence that this money was given naturally.
To get this evidence, you will need to provide to the lender a documented letter that proves that the lender is consenting to donation. On top of this, the mortgage lender will also ask the donator for a bank statement of up to 3 months to show where they got the money from.
This verification is to prove that the money isn’t laundered and comes from a reliable source of income.
*Based on a 7 bedroom property in the Lake District with bookings between October 2017 to September 2018.
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