Are you a self-employed individual who is looking to buy a holiday let property?
Well, you’re not alone. The number of self-employed people has been steadily rising over the years, but despite this growing trend, securing a mortgage as a self-employed person can be challenging.
This article will provide you with valuable tips and strategies to successfully obtain a holiday let mortgage.
How do Holiday Let Mortgages work?
Holiday let mortgages work by allowing self-employed individuals like you to finance the purchase of a property specifically intended for short-term rentals, such as through platforms like Airbnb.
These mortgages offer various options, including fixed rates and flexible repayment methods, to suit your financial needs.
When it comes to interest rates, they can vary depending on several factors such as the loan amount, property location, credit history, and income stability.
Typically, these rates are slightly higher than those offered for traditional residential mortgages due to the increased risk associated with short-term rentals.
Repayment options for holiday let mortgages are designed to provide flexibility. You can choose between interest-only payments or capital repayment plans based on what suits your financial goals. Interest-only payments are cheaper and allow you to pay only the interest portion of the loan each month while capital repayment plans enable you to gradually pay off both principal and interest.
Factors that may affect approval for a holiday let mortgage include your credit score, income stability as a self-employed individual, and affordability assessment conducted by lenders. Not forgetting the property itself and the potential income it can generate.
What does self employment mean?
Being self-employed means working for yourself and having control over your own business or profession.
It offers a range of advantages, such as the ability to set your own schedule, pursue your passions, and potentially earn a higher income. However, when it comes to obtaining a holiday let mortgage, being self-employed can present some unique challenges.
To be eligible for a mortgage as a self-employed individual, you typically need to meet certain criteria:
- Demonstrated stability: Lenders want to see that you have been in business for at least two years and have consistent earnings.
- Proof of income: You will need to provide documentation showing your earned income, such as tax returns or certified accounts.
- Good credit history: A good credit score is crucial in securing a holiday let mortgage.
It’s important to note that the documentation requirements for self-employed applicants may be more extensive than those for traditional employees. You may be required to provide additional documentation such as profit and loss statements and/or bank statements.
If you are a company director that owns 20% or more of your business, you will usually be treated as self-employed for the purposes of arranging a mortgage.
The Application Process
The application process is generally more complex due to the need for additional documentation and income verification.
You may already be familiar with the challenges of proving your income and meeting the requirements set by lenders. When applying for a holiday let mortgage, it is important to understand what is expected from you.
To start, lenders will require thorough income documentation. This includes providing tax returns, SA302, bank statements, and profit and loss statements for your business. The lender wants to ensure that you have a stable source of income that can support the mortgage payments.
In addition to income documentation, your credit history will also play a significant role in the application process. Lenders will assess your creditworthiness based on factors such as payment history and outstanding debts. It is crucial to maintain a good credit score by making timely payments and managing your finances responsibly.
As part of the application requirements, you will need to provide proof of rental income. This is normally provided by a holiday letting agent, who will estimate the weekly rates for low, mid and high season.
Lastly, lenders will consider the loan-to-value ratio (LTV). The LTV ratio compares the amount of money being borrowed against the value of the property. Generally, lenders prefer lower LTV ratios as they indicate less risk.
Most lenders need a minimum deposit of 25% for a 75% LTV mortgage.
Tips and Strategies to Successfully Get a Holiday Let Mortgage
Obtaining a holiday let mortgage can be made easier by following these helpful tips and strategies.
First, it’s really helpful to plan ahead.
As a self-employed person you have a degree of control over how much you earn and when.
This is particularly relevant to company directors, who have the option of only drawing the level of income that they need, and leaving any excess for another time (or tax year). Although a small number of lenders will include retained profits if needed.
So if you know when you might be applying for a mortgage, then make sure your declared income is sufficient and you have all of the necessary paperwork.
A similar approach can be taken with your credit profile. Don’t take on new credit in the 12 months before needing a mortgage, and make your your repayments are always made on time. Where possible, payoff or reduce any unsecured debts.
Speak with a mortgage broker.
The most obvious time to make contact with a broker is when you need a new mortgage. But this is not the best time.
Speak to a broker at the earliest opportunity, and before you have found a property to buy.
They will be able to check your finances to see what level of mortgage you qualify for. If this is not quite enough then there is time to make some adjustments, before making an application.
How a mortgage broker can help
Working with an independent mortgage broker can greatly assist individuals who are self-employed in finding the best financing options for their specific needs.
Brokers are experts in self-employment, including company directors, freelancers, CIS workers, contractors and more.
Here’s how a mortgage broker can provide guidance and support throughout the process:
- In-depth knowledge: Mortgage brokers specialise in understanding the intricacies of different loan products and lenders. They have access to a wide range of options specifically tailored for self-employed individuals seeking holiday cottage mortgages.
- Market insight: Brokers stay up-to-date with market trends and changes in lending criteria. This ensures that they can identify suitable lenders who are more likely to approve applications from self-employed borrowers.
- Negotiating power: With their industry connections and experience, brokers can negotiate on your behalf to secure favourable terms, such as lower interest rates or flexible repayment options.
- Simplified application process: Mortgage brokers streamline the application process by gathering all necessary documentation and preparing your application package. This saves you time and effort while ensuring that everything is submitted correctly.
- Personalised advice: A mortgage broker will assess your unique situation, taking into account factors like income streams, tax arrangements, and credit history. They will then offer personalised advice on which lenders may be most suitable for you.
Additional reading:
How we can help
Drake Mortgages is an independent mortgage broker that has specialised in holiday let mortgages since 2006.
There’s not much that we don’t know, or haven’t seen!
And, we are experienced in dealing with self-employed clients, business owners, company directors and entrepreneurs.
Please call us on 020 8301 7930 for an initial chat.