Dear Delia

Dear Delia, Wayne has inherited 50,000 and wants to buy a holiday home. He will rent the property out and occasionally use it for family holidays. He has seen a property in Cornwall for 250,000. He is earning sufficient income to support his mortgage and commitments and support the new loan but he can\'t find a lender who will lend up to 80% LTV for a holiday home he may use himself. What are his options?

Delia says: Wayne can do home and away but he may have to pay. Sally Laker of Mortgage Intelligence and Simon Evans at Scarborough tease out the options.

Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary response
Sally Laker is managing director of Mortgage Intelligence

Buying holiday homes is increasingly popular and plenty of lenders can offer finance for this type of purchase, although some impose restrictions.

For example, Chelsea will lend up to 75% LTV but states the property must be for the customer’s personal use and not be let out. Alliance & Leicester is similar in that it insists the property is for personal use only but it will lend up to 85% LTV.

If Wayne is adamant that he wants to rent his property out as a holiday let when he is not using it himself, this reduces the number of lenders who will consider his mortgage application.

Leeds would consider it but its LTV ratio is restricted to 70% so Wayne would need to either provide a larger deposit or look to purchase a cheaper property. It also requires that the applicant’s minimum income is 40,000 and that the rental income from the property is 130% of the mortgage payment.

Stroud & Swindon would treat the purchase as a second home loan and therefore require Wayne’s income to be sufficient to support all his commitments plus the new loan. The property must not be subject to any restrictions such as limited access during certain seasons or times of year, which can be typical of certain types of purpose-built holiday homes. It would offer 75% LTV and could offer Wayne a two-year fixed rate of 5.29% with an arrangement fee of 1,000However, Scarborough would lend up to 80% LTV and treat the purchase as self-funding. The rental would need to be 150% of the mortgage payment and Wayne would also need to cover the rental payments during his stays in the property.

At the moment, Mortgage Intelligence can offer an exclusive rate on this type of purchase with a two-year tracker at 5.74% (base rate plus 0.49%) with an arrangement fee of 695.

But covering the mortgage is only one consideration when buying a holiday home.Wayne also needs to consider the related costs and risks with this type of purchase. He will have to maintain the payments even if he is unable to let the property and have public liability insurance in place to protect against claims from guests due to accidents.

Specialist buildings and contents insurance will be particularly important in the event of damage caused by guests. Maintenance and regular cleaning costs must be considered, especially if it is not possible for him to visit the property to prepare it for the arrival of guests.


Lender response
Simon Evans is group relationship manager at Scarborough

Buying an investment property is an attractive proposition for people looking to bolster pension provisions and lured by the potential of rising property values.

Traditionally, such people look to buy properties and rent them out on assured shorthold tenancy agreements for periods of six or 12 months.

Buying a property for the holiday let market offers the potential to achieve higher rental figures. This is increasingly appealing to investors due to falling rental yields in the wider market over the past few years. Also, because rental periods are normally only one or two weeks at a time, investors can benefit from using properties for their own purposes.

Unfortunately, despite the popularity of holiday lets, few lenders lend on such properties on a self-funding basis, i.e. taking account of anticipated rental income and using this to cover repayments. This is due to the uncertainty of rental income and because there is no assured shorthold tenancy agreement in place. Also, valuers generally don’t provide anticipated holiday rental figures, unlike with traditional buy-to-let properties where they have greater knowledge of the marketplace.

We lend on holiday lets on a self-funding basis and have a range of holiday let mortgage products that offer competitive rates. We will lend up to 80% of the purchase price (or property value) which, based on 250,000, equates to 200,000. Wayne would need to use his 50,000 as a deposit.

For us to treat a property as self-funding we require the anticipated annual rental income to cover 150% of the annual mortgage payments based on the prevailing interest-only pay rate.

Our holiday let rates start from 5.89% which means rental income would have to be 17,670 per year. To provide evidence of the anticipated rental income we would require a letter from a suitable holiday letting company outlining the realistic rental income achievable based on the type of property, its location and market demand.

Even if there were to be a shortfall in anticipated rental income we would still consider Wayne’s application due to his ability to fund payments from his own resources.

Other criteria would need to be satisfied including Wayne having a minimum income of 25,000, the property being of standard construction with no unacceptable restrictions and Wayne having a clean credit history.