April 25th, 2019. Tom Rowlands
Second Home, Holiday Home, Investment Property: What’s the Difference?
Commonly, investors become confused between holiday let mortgages and those for second homes. Then, when you add investment property on top of it, it’s easy to get tangled up in seemingly confusing property mortgage jargon. On the surface, each definition can appear similar, but each has its own unique nuances that need to be considered before investing.
Holiday Lets Aren’t Second Homes
Shock news: holiday lets aren’t second homes. Holiday lets are fully-furnished homes that are let out to holidaymakers at set times of the year. By using this income from these short-term lets, the owner of the property hopes to use the profits to pay off the mortgage and start making a sustainable income off the property. While a holiday let isn’t a second home per se, a landlord can reside in the property for a set period.
Holiday let mortgages are usually a difficult prospect for most investors. The reason being, it is difficult for the lender to establish exactly when the property will be rented out and at what rates this rent will be paid at. Seeing as holiday prices fluctuate with the seasons, calculating an average amount of rental income from a holiday let property is very difficult. This fluctuation, in a lender’s eyes, equates to risk; if a borrower is relying on the rent to pay the mortgage, then a lender will want a guarantee for this rent being paid.
As usual, increased risk means a bigger deposit. Typically, you’ll be looking to pay a larger deposit than normal for a holiday let, balancing out at an average of 25%.
Holiday lets are worth the punt, though. They are an excellent option for retirement plans, for example. You can rent out the property while you live in your current home to pay the mortgage and make a bit of profit. Then, when it comes the time to retire, you can downsize and sell your current home to move into the holiday let. This, hypothetically, leaves you with an extra bit of money in your purse, as well as helping to pay off the holiday let mortgage.
Second Homes: Time Well Spent
The major difference between a holiday let and a second home is the amount of time you spend in it. Second homes are defined as a residence which you plan to occupy for part of the year. Typically, this home is a significant distance from your primary residence, such as a city-based pied-a-terre that is lived in during the working week.
The property must meet these requirements to abide by the majority of second property lenders’ requirements. You must make it obvious that you’ll be using this home to live in; otherwise, the lender may have reservations about providing funds to mortgage it.
The terms of a second home loan are like vanilla residential loans, but they will feature stricter affordability checks. Since it’s your second home, a lender will want a full breakdown of existing costs, outgoings and income. Thankfully, this stricter vetting doesn’t usually equate to greater interest rates and fees.
What’s The Definition of an Investment Property, Then?
Investment property shares some similarities to holiday lets but is entirely different to a second home. An investment property is a property you own which is rented out. As the name suggests, an investment property is, well, an investment. By renting the property out and generating income, as well as an increase in the house price, an investment property is a savvy way of generating gradual income.
In terms of investment property mortgages, these have the greatest restrictions out of the bunch. Since somebody else, other than the landlord, will be residing there and providing the landlord with the money to pay off the mortgage, it is seen as a commercial deal.
Loan-to-value (LTV) rates will be higher, and lenders will want better than usual credit scores and asset reserve requirements. In simple terms, it’s tougher to qualify for this mortgage, and you’ll have to pay ;a bigger desposit.
Thankfully, jumping through these loopholes is worth it, as investing in property is an excellent way to generate income long-term.
Which Mortgage Is Right For Me?
Here at Pure Commercial Finance, we have an experienced team of brokers who work with a network of leading commercial mortgage lenders to find the right deal for you.
We know which lenders suit your specific requirements, so do get in touch to make the most of your commercial property.
Article By Tom Rowlands
April 25th, 2019
Tom joined Pure Property Finance in 2017 after a career as a Client Wealth Manager, where he spent just under 3 years advising on financial and tax planning. Tom specialises in bridging finance and property development funding, having completed deals ranging from a simple £30K property purchase through to £2m+ mixed-use developments.See more articles by Tom