Holiday lets have been a key investment trend for Buy to Let landlords in the last year and for obvious reasons. A successful holiday let has always been able to deliver better returns than a comparable property let on an AST, albeit accompanied by more costs and inconvenience, and the phenomenon of pandemic-driven staycations has pushed those potential returns through the roof.
There are still many considerations for landlords, of course, and investing in a holiday let is not a guaranteed formula for success, but the opportunity has peaked investors’ interest and lenders have responded with the launch of new holiday let products and propositions.
However, not all holiday let propositions are created equal and there are some key criteria that can make the difference between a deal that works and one that doesn’t.
One piece of criteria that can prove critical as to whether or not you can secure funding for your client’s holiday let aspirations is how the lender assesses the affordability of the loan. Many lenders launch holiday let products but still base their affordability assessment on the income achievable on an AST basis, even though a holiday let could earn a far greater amount, meaning that the client could borrow more towards it.
This criteria is most notable on larger, more expensive properties, which can often prove to be the most in demand holiday let investments. For example, recently at Daven Trust, we worked with clients who were looking to raise funds to purchase a holiday let property on a converted farm valued at £1.3m, borrowing up to 75% LTV. In order to achieve this leverage, the clients needed a lender that would be able to base its assessment on the holiday let income rather than AST rental income. An added complication was that this was to be the clients’ first holiday let investment. We were comfortable with the clients’ proven letting experience given their existing portfolio and we also use the projected average of the high, medium and low monthly holiday rental figures, which mean they were able to achieve the loan they needed.
Even for those lenders that do use holiday let income rather than AST, establishing a track record of earnings potential can be tricky. Another client we worked with was an experienced landlord operating through a limited company. They were looking for a loan to purchase a holiday let property located in a popular holiday region and wanted to raise 70% LTV to purchase the property and make some improvements to improve marketability and rental yield. However, the COVID-19 restrictions severely restricted the client’s ability to take on bookings, which would have made it difficult to service a loan whilst the lockdown was in place.
Seeing the potential of a large property in a popular holiday location, we were able to provide a Buy to Let bridging loan, which allowed the client to purchase the property without the need to service the interest, and to accumulate bookings during that period ready for when restrictions were eased.
So, if you have clients who want to invest in holiday lets, make sure you work with a lender that offers criteria that makes it easy for them to make their aspirations a reality.