Buying a holiday home – negotiating a mortgage and moral maze
B uying a home to let out as a holiday rental just got easier. This week, Leeds building society launched a range of holiday let mortgages with interest rates starting at just 3.4%, joining other lenders offering similar low-priced deals. But with parts of the Lake District now 80% taken over by second homes and holiday lets, are such mortgage deals a moral minefield?
It is not just the traditional holiday hotspots of Cornwall and the Lake District that are seeing an influx of buyers. Whitby in North Yorkshire and Southwold in Suffolk are fast becoming the target of investors hoping to profit from the growing trend for staycations. As Mike Lawson of Home Counties Mortgage Services. a specialist in loans for holiday lets, says: "We are doing mortgage after mortgage after mortgage in Whitby."
Analysis of census data by the North York Moors National Park Authority, released earlier this month, reveals a 27% jump in the past decade in the number of second and holiday homes in the area, which surrounds Whitby and includes other popular resorts such as Runswick Bay and Robin Hood's Bay.
Critics argue that once outside buyers deluge an area – the tipping point is estimated to be 20% of the local housing stock – its social infrastructure declines rapidly. Whole villages lose young people and families, the people moving in tend to be retired, while local wages fall far behind the price that outside bidders can pay for property. In the North York Moors, for example, the average home costs £257,000 – more than 10 times local incomes.
Occupancy restrictions offer limited protection for local communities, says Sarah Housden, policy manager at the park. "We can only attach restrictions to new build properties. Around 90% of the housing stock in the park is unrestricted and can be bought as a second home or holiday let."
Others argue there is a big distinction between second homes, which may be unoccupied 48 weeks a year, and holiday lets, which bring in high-spending tourists vital in keeping local attractions, restaurants and bars busy.
So what deals are on offer, and are you crossing an ethical line?
The mortgage providers
The main lenders in the holiday let market are the Leeds, Cumberland and Principality building societies, with the Bath and Market Harborough societies sometimes offering deals. A few specialist brokers also operate in this area, such as Home Counties Mortgage Services (01494 716600).
The big high street lenders traditionally steer clear of holiday homes, even if they do buy-to-let. They don't like the sporadic nature of the rental income and prefer the security of a six-month assured shorthold tenancy.
Individuals who have large amounts of equity in their existing property can remortgage to release cash to buy a holiday let, but will be treated on standard affordability criteria. No institutions will lend on a holiday home to let outside the UK.
Buyers will have to put down a minimum deposit of 25%-30%. The maximum that can be borrowed is usually £250,000, although in certain cases the Cumberland may go higher. The mortgage will almost certainly be on an interest-only basis, rather than repayment, which keeps costs low and has tax advantages.
Applicants will also be expected to have a minimum income of £40,000 at Leeds, £30,000 at Princ ipality and £25,000 at Cumberland. You must already own your principal residence.
"If you have a £70,000 income but already have a £400,000 mortgage, a lender wouldn't typically approve you for a holiday let loan," Lawson says.
Required letting income
Lenders will want reassurances about the local holiday lettings market guardian.co.uk
Lenders will typically look for gross rental income to be equal to 125%-130% of the mortgage payment. For example, to borrow £100,000, rental income would need to be a minimum of £4,420, assuming you are paying Leeds's 3.4% rate (£100,000 at 3.4% is £3,400, 130% of which is £4,420). That would suggest that if you bought a property at £125,000, put down a £25,000 deposit and borrowed £100,000, you would only need
to let it at £500 a week over 10 weeks to meet the criteria. But there will also be hefty management costs for marketing, cleaning and maintenance.
In addition, Leeds's 3.4% rate is for a two-year fix, after which it rises to 4.99%. It also has a five-year fix at 4.29%, while Cumberland starts at 3.45% rising to 4.99%. As a rule of thumb, brokers say borrowers should assume that over the longer term they will need around £8,000 of rental income per £100,000 of borrowing.
Lenders will want two projections from established local letting agents about the realistic income the property will generate before agreeing a deal.
The tax position
Holiday lets are essentially a property letting business, says DHC Accounting, the major tax advisor in this area. The interest on the mortgage is an acceptable deduction for income tax purposes, so if you make £10,000 a year in but the mortgage interest was £8,000, you are only liable for tax on the £2,000. What's more, there are capital allowances for furniture and fitted kitchens etc, and utilities and insurance can also be put against the letting income.
As a business asset, capital gains tax is just 10%, and it may be exempt from inheritance tax (subject to an ongoing court case). To qualify, the property has to be available as a furnished let for at least 210 days a year. DHC has a full guide on its website.
The ethical dimension
In the Lake District some local residents are angry that they are being squeezed out by rising house prices compared to earnings. Photograph: Alamy
In parts of the UK, some communities feel deeply aggrieved that outside buyers are squeezing locals out. In a recent housing needs survey for the Cumbria Rural Housing Trust, the anger was explicit. "Housing should be for local occupancy only – no more conversions or building for holiday homes," says one.
"What is needed are affordable first-time buyers – homes at a realistic cost for seasonal/low-wage workers," says another. "Please consider our young families' needs. They are our future in the Dale, or else it will become a Dale of just old people and our wonderful school will become defunct. What an awful thought and tragedy."
Cumberland building society, a mutual whose home patch includes the Lake District, defends its decision to lend on holiday lets. David Winton, head of marketing, says: "We are very active in providing standard residential mortgages to the people of Cumbria. We also do a lot of funding for affordable housing schemes. The issue of second homes and holiday lets is not a new one in this area. The percentage of lending for holiday lets is small in comparison with our total loan book, and less than 15% of it is in the south Lakeland area. We lend all over the UK, from Scotland to Cornwall."
Campaigners, meanwhile, make a firm case against second homes, but are less clear cut about holiday lets. Andrew Wallis, a councillor in the Cornish village of Porthleven, has blogged extensively about the impact outside buyers are having on the county .
"I am not opposed to holiday lets, and people often confuse the issue with second homes. Holiday lets can create jobs, and Cornwall does of course rely on the tourist trade. But there needs to be a balance. In Rock, 60% of all dwellings are not regularly lived in. Anything under 20% can be seen as positive as it brings in trade, but once it goes past 20%, then it tends to have a negative impact."
He says it's not just house prices that are out of reach of local people, but rents too: "In Porthleven you now have to pay £650-£750 a month for a two- to three-bed apartment.
"[We need] primary legislation that, to turn a dwelling into a second home or holiday let, would require planning permission for a change of use. That way they can be monitored and, with the right policy, stop these types of dwellings having a negative impact on local communities."Source: www.theguardian.com