As internet-fuelled short-term letting gains popularity, will lenders get on board with ‘Airbnb mortgages’ or risk having their rules broken by thousands of customers?
The Airbnb revolution is upon us, but many brokers say mortgage lenders have yet to get to grips with the rising popularity of internet-fuelled short-term letting.
In recent years, many banks and building societies have eased restrictions for homeowners who let out their property after moving out for good, or who take in a lodger. However, most major lenders do not permit clients on a buy-to-let or residential mortgage to rent out their entire primary property through short-term or holiday let sites. They maintain that such letting – via the likes of Airbnb, Homeaway and TripAdvisor Holiday – comes with big risks.
Nevertheless, a few building societies have developed products to cater for the growing army of often-makeshift landlords – indicating there may be a place in the market for ‘Airbnb mortgages’.
The number of UK short-term lets – usually with a term of less than six months and with bills included – is considerable. Analysis website insideairbnb.com estimates a total of 110,000 UK Airbnb listings, of which just over half are for entire homes. Many would-be short-term landlords are flocking to the online rental market-place because the returns can be far greater than for traditional rentals of six months, one year or longer.
A lot of members of Airbnb own their home outright. However, if mainstream lenders fail to keep pace with this technology-based rental boom, they risk having their lending rules broken by tens of thousands of borrowers.
“Even though Airbnb has been around [since 2008], it is not on lenders’ horizons,” says John Charcol executive mortgage and protection consultant Alistair Hargreaves.
“The nearest mortgage we have is a holiday let, but even here Airbnb is not recognised as a true letting agent.”
Coreco director Andrew Montlake adds: “Lenders are yet to get to grips with this and the majority still insist on a regular assured shorthold tenancy.
“Consumers are beginning to demand more rental flexibility so there is no doubt that, with fundamental changes to the way people interact with technology and the short-term nature of society, this is more than a passing fad.”
Airbnb’s growth has been breathtaking: in the summer of 2010, around 47,000 people worldwide stayed at properties advertised on the site; by the summer of 2015 the number had rocketed to almost 17 million. Conceived as a simple means of letting out a spare room, the site is morphing into a much larger beast.
Behind the curve
However, of the big seven lenders contacted by Mortgage Strategy, only Nationwide and Santander allow a form of Airbnb-type letting of an entire primary property – albeit with an additional charge. A few other lenders permit this on second homes.
Using Nationwide as an example, on a borrower’s primary residential property it is “likely to be accommodating to Airbnb-type letting as long as the borrower informs us in advance and has appropriate insurance”. The lender does not allow short-term lets on buy-to-let mortgages.
Montlake says it is likely that some buy-to-let investors simply assume they are permitted to rent out their property on whatever terms they choose. Yet the big lenders are at their most restrictive with buy-to-let mortgages and short-term lets.
According to Trinity Financial product and communications director Aaron Strutt, the most accommodating lender is Market Harborough Building Society. It has a mortgage designed especially for landlords using Airbnb and similar sites, which Strutt labels “unique”.
MHBS has a quasi buy-to-let ‘holiday let range’ for landlords. It also has a residential mortgage through which borrowers can let their main residence for up to 24 weeks a year. The catch with both products is that the rates are high. Both are a discount off the standard variable rate with a 1 per cent arrangement fee.
The holiday let rate is currently 4.49 per cent, at a maximum 70 per cent loan-to-value. A similar, standard buy-to-let deal can cost about 2.3 per cent, with a £2,000 arrangement fee.
The residential mortgage is currently 3.99 per cent at a maximum 75 per cent LTV. On a standard lifetime tracker it is possible to pay just over 2 per cent with a £1,000 arrangement fee.
A number of other building societies offer flexibility by allowing either holiday or short-term lets. These include Bath, Cumberland, Furness, Harpenden and Leeds.
However, they do not all permit lettings via sites such as Airbnb. For example, Leeds says its mortgages “support permanent holiday lets and not intermittent short-term letting, such as occasional Airbnb lets”.
For this reason, clients who use an official holiday let mortgage may still require a quote from a local letting agent, warns Hargreaves.
He adds: “I suspect most clients will do this on the quiet. But they may find their insurer checks with the lender to make sure it knows the house is being used as a short-term let.”
Getting it wrong can be costly because, if borrowers break their bank or building society’s rules, they risk a rate rise, a credit file black mark and their home insurance becoming invalid. In extreme cases, the lender could seek immediate repayment of the entire mortgage debt.
Landlords may also need consent from their freeholder if they own a leasehold property. The UK’s highest property court, the Upper Tribunal Lands Chamber, ruled last month that, where a lease states the property can be used “as a private residence only” – which many lawyers say is common – people cannot rent out their home on a short-term basis if they do not live there too.
Managing director of the Association of Residential Letting Agents David Cox says properties in big cities such as Birmingham, London and Manchester are often let without consent and in contravention of the tenancy agreement.
Strutt adds: “Many borrowers do not realise they can get in a lot of trouble for letting their home without permission.
“We were contacted by someone who had let their property as a bed and breakfast and the lender had found out. They had an entry from counter-fraud agency Cifas added to their credit report and were stuck on an expensive standard variable rate.”
Lenders’ advice to borrowers is to always inform them of their intention to let out a property – whether a short or long let or a single room – which will help them to understand the rules. It also gives them the opportunity to try to twist their lender’s arm; the Council of Mortgage Lenders says sometimes permission is granted in “exceptional cases”.
Hargreaves says this is most likely when the client uses “a mixture of local letting agent and Airbnb”, although, as there are no clear guidelines, this still leaves homeowners in a “grey area”.
Strutt adds that over the past few years the biggest lenders have eased their consent-to-let policies for people who move out completely and want to let their property on a long-term basis. Meanwhile, the CML says some lenders allow homeowners to take in a lodger while still living in
However, neither of these concessions applies to short-term lets across the board. The CMLsays lenders prefer not to grant permission for short-term lets because of the greater risk of property damage and of periods without a rental income, which could leave clients struggling to repay their mortgage.
So will more lenders enter the fray to provide enhanced options for borrowers?
“I suspect niche lenders will come in and offer bespoke products,” says Montlake.
To ensure homeowners follow the rules, those who want to let out their property for short periods, or to lodgers, also require specialist home insurance, although, as with a mortgage, this is often unavailable via mainstream policies and customers may have to find a specialist provider.
Insurance giant Towergate explains that, while Airbnb’s guarantee covers hosts for up to £600,000 in damages during an ‘eligible’ booking, this is not an alternative to home insurance.
It is no surprise that short-term lets have become so popular: for holidaymakers they are often a cheaper alternative to hotels, and for owners they can provide a greater income stream – assuming no void periods – than long-term lets.
Returns will be boosted further from April next year when the first £1,000 of income earned this way will become tax free.
Using London as a case study, according to TripAdvisor the weekly earning potential in the capital is £1,765, which translates to £7,648 over a month if the home is continuously occupied – albeit many experts deem that unlikely. In contrast, rental income from a standard longer-term agreement is likely to be significantly less, although estimated figures vary between data providers. The website home.co.uk says the potential monthly income in London from a standard tenancy is £2,846, while property firm Countrywide puts it at £1,280 in Greater London or £2,638 in central London.
By contrast, an Airbnb host must let out their home for only about 11 days a month in order to earn an equivalent amount. If they were to rent out their home continuously, they could net more than two-and-a-half times the income from a long-term let.
However, Cox warns: “Returns will be higher only if the property is constantly occupied, which is unlikely. When spreading incomes over a year for short-term lets and a long-term tenancy, they are probably going to be similar.”
He adds that upkeep and maintenance costs are likely to be higher on short-term lets because of the greater turnover of tenants.
While Airbnb-type letting is becoming increasingly popular, Strutt thinks it will never be as common as traditional buy-to-let. Nevertheless, the short-term market is already big enough to be taken seriously by lenders.
Montlake gives a broader warning, however. “There is concern that, if Airbnb takes off dramatically, this will further impact the availability of long-term rental units, which will have social and economic implications,” he says.
Market Harborough Building Society’s ‘Airbnb mortgages’
The lender has two mortgages for hosts on Airbnb and similar websites. MHBS says it “understands our products need to provide bespoke solutions for modern lives”. It adds that customers who let their home should contact it for permission and inform their home insurer to ensure they have adequate cover.
Holiday let range
This allows borrowers to let their property via Airbnb, or a traditional letting agent, whenever they want and with no time restrictions. It requires a rental return of 125 per cent of the repayments. This mortgage differs from a standard buy-to-let because there is no requirement for an assured short-hold tenancy agreement.
- Rate: 4.49 per cent variable for the full term (SVR minus 1 per cent)
- Arrangement fee: 1 per cent of loan
- Maximum LTV: 70 per cent
- Minimum loan: £100,000
Residential mortgage with consent to holiday let
This allows customers to let or part-let their main residence for up to 24 weeks a year. They can let via Airbnb-type sites, privately or via letting agents. No tenancy agreement is permitted.
- Rate: 3.99 per cent variable for the full term (SVR minus 1.5 per cent)
- Arrangement fee: 1 per cent of loan
- Maximum LTV: 75 per cent
- Minimum loan: £100,000