One of the best ways to generate additional income in the current market is to diversify your financial portfolio so that it includes as many sources of passive income as possible. And one of the most effective ways to make a quick profit after significant investments is to look into renting out a holiday home. But many of us don’t benefit from the luxury of secondary residences, so the best alternative to get into this field and start generating profit is by turning to holiday let mortgages. But what do they entail and why can they be the ideal solution for you?
Holiday let mortgages are a special type of mortgage that deal with covering the costs of purchasing real estate properties that in the majority of the year will act as holiday homes, which will be rented out and generate a passive income. It can be an ideal way to diversify your revenue, especially if you plan to buy a property in an area that is heavily frequented by tourists, as long as you can cover the costs associated with maintaining such a property.
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Are Holiday Let Mortgages the Same as Buy-to-Let Mortgages?
Not exactly. These types of mortgages indeed fall in the same category as buy-to-let mortgages, but the key difference lies in the way your income will be generated. Holiday proprieties are generally considered seasonal ventures that can only generate passive income during the peak months of the tourist season. Let’s say you would like to buy a holiday home in a popular mountain area for ski enthusiasts. That holiday home is likely to bring you a nice profit in the winter months when the number of tourists is high, but in the warmer months, the maintenance costs of the property are also likely to reduce the total profit generated by the location.
The same applies if you want to purchase a property in a seaside resort and then rent it out. The property will generate a significant profit in the warmer months of the year when the beaches are packed, but in the winter months, the maintenance costs will not be covered by the potential tourists. This lack of a steady income makes these types of mortgages a higher risk for lenders, so the costs associated with holiday let mortgages are generally higher, with most lenders requiring a minimum 25% deposit for such mortgages and a baseline income of at least £20,000 without including here any profits made by rentals.
What are the Requirements for Obtaining Such a Mortgage?
Many factors can influence the success of obtaining holiday let mortgages. The number of properties the applicant owns or the annual income of the household, are part of the standard criteria for such a mortgage, but there is also the possibility of being approved for such a mortgage if you provide a professional analysis of the future profit that could be obtained from rents, once the property is yours. It should be noted that such a loan, which presents a higher risk for lenders, usually has a higher interest rate than a regular mortgage, and therefore in most cases, you need to call on a third-party firm to present a competent and professional analysis of the expected income after the acquisition of the property.
Will This Be a Good Financial Investment?
This very much depends on your expectations and how comfortable you are with managing the finances of a rental property. Over 65% of UK residents are homeowners but yet only around 870,000 UK households reported owning a second house. The potential for an investment that will bring you a healthy profit is there, but you also need to consider the additional costs of a property that will realistically only generate income for a few months a year.
You need to consider the maintenance and cleaning costs of a rental property as well as the costs of insuring such a residence, which are generally higher than the costs of a regular household. Also, your work schedule or the location of the property may not make it realistic for you to be present for each new tenant, so you may need to employ specialized staff to professionally manage the property. Costs can escalate quickly, and you should be prepared for unexpected expenditures.
Does that mean I shouldn’t pursue such an investment? No, renting a vacation home can be a great way to earn additional passive income. But one of the best ideas for your financial security would be to enlist the professional services of a brokerage firm that would make sure you fully understand the costs involved with such an investment, and that will take all the necessary steps for the success of your mortgage application.
What if I’m Interested in Self Employed Mortgages?
There are many people interested in getting self employed mortgages who think they will be rejected on the grounds of financial security. However, this should not necessarily be an impediment, and if you have been self-employed for at least two years and/or own at least 25% of a business that provides you with a stable income, then it is possible to qualify for self employed mortgages.
This stable income can come from various sources, with some lenders even accepting unemployment income, while the success of your application depends on the same factors as a regular mortgage, such as your credit score, your debts, your work history, or the market value of your house.
One of the problems faced by most applicants who are interested in self employed mortgages is related to obtaining the proof of taxable income necessary for the success of the application, and this may represent a good enough justification for using the services of a professional mortgage broker that can handle your application and offer you the best options for the financial security of your family.
Self employed mortgages should never be more difficult to obtain than conventional mortgages so do the responsible thing and ask for the help of a specialized broker.
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