All of this has the effect of increasing the potential profitability of a holiday let.
This potential is also reflected in the calculation of affordability when it comes to mortgages for holiday lets. The only problem you might encounter when looking for a suitable mortgage, however, is the fact that not all lenders may be interested in funding such an investment.
To help you find an appropriate, specialist lender, offering a competitive rate of interest on the mortgage, therefore, you might want to use the services of a broker with the expertise and experience of arranging holiday let mortgages.
When you find a suitable lender, a calculation needs to be made on the anticipated return on holiday rentals. These returns on the very short-term tenancies you are granting to holiday visitors are likely to be substantially different from those you earn on the standard Assured Shorthold Tenancies generally granted to long-term buyers to let tenants.
The valuation of your holiday home investment and an assessment of your likely rental income, therefore, needs to be done by a specialist holiday lettings agent and confirmed by the mortgage lender prepared to offer you the necessary advance.
You may find that your lender also requires a more substantial deposit on the purchase price than, say, a standard buy-to-let mortgage. For this reason, some owners turn to a further mortgage on their principal place of residence in order to secure the necessary deposit.
What Type of Mortgage Do I Need for a Vacation Home?
Fixed-Rate Mortgage for Vacation Homes
When it comes to financing a vacation home, a fixed-rate mortgage is one of the most popular options. A fixed-rate mortgage offers borrowers the security of knowing that their loan payments will not change over time. With this type of mortgage, borrowers will select a loan term that fits within their financial goals. The most common loan terms are 10, 15, 20, and 30 years; however, some lenders may offer other terms as well.
In addition to offering the stability of unchanging monthly payments, a fixed-rate mortgage also typically offers borrowers lower interest rates than other types of mortgages. This makes the proverbial pie larger because monthly payments are kept low while paying off the loan over time. Furthermore, many lenders who issue this type of mortgage offer attractive incentives such as no application fees or closing costs for loans up to $250K.
Adjustable-Rate Mortgage for Vacation Homes
The adjustable-rate mortgage (ARM) is another financing option when it comes to purchasing a vacation home. An ARM offers lower interest rates than fixed-rate mortgages and often has an initial period where the rate is held constant before adjusting every year thereafter. The length of this constant rate period varies among lenders and can range from one to ten years depending on the financial institution or program guidelines.
After the adjustment period begins, interest rates can go up or down depending on market conditions; however, certain caps prevent interest rate increases beyond amounts predetermined by the lender at origination. Further protecting borrowers from skyrocketing interest rates is an annual cap that limits increases between adjustments and lifetime caps that limit cumulative rate hikes throughout the life of the loan.
Portfolio Loan for Vacation Homes
Portfolio loans are another type of mortgage used by those looking to purchase vacation homes. This type of loan is originated directly by a bank and held in their portfolio rather than being sold on secondary markets and securitized like conventional loans issued by Fannie Mae or Freddie Mac. Because these loans do not need to conform to Fannie Mae or Freddie Mac’s underwriting guidelines they can often be more tailored specifically to meet an individual borrower’s needs compared with other types of mortgages available today. As such they might be offered with fewer restrictions on documentations requirements or even cash reserves than what would normally be required with other forms of financing when buying an investment property or second home making them ideal for vacation home purchases requiring only minimal down payment levels in some cases as low as 3%.