Getting a Mortgage for a Residential Home with Holiday Lets

We are commonly asked by our customers: “Can I live in my holiday let?”. Generally speaking, it’s a simple answer of ‘no’. There are strict regulations in place which prevent an owners’ usage of their holiday let to exceed a certain amount.

This question does become more complex, however, when a property has more than one liveable building. It’s common now to see holiday lets which reside in the grounds of a main property; what happens if the owner wants to live in the main house and rent out the smaller, lettable units? This situation is known as ‘mixed use residential’ and requires a special type of mortgage.

What is a mixed use residential property?

A mixed use residential property is typically a large house with smaller houses or cottages located elsewhere in the grounds and importantly, each house is listed on the same title deed. The question of holiday letting could arise for one of two reasons.

Firstly, the owner has lived in the property for some time but decided to rent out the outbuildings for some extra income. Secondly, the buyer wants to purchase the property with holiday letting the garden units in mind. Whichever the circumstances and even if the owner views holiday letting as merely a ‘hobby’ business to make full use of the property, things must be done properly to ensure that their mortgage contract isn’t breached.

Looking back at the query as to whether the owner can live in their holiday let, in the case of a mixed use residential, the owner is permitted to live in one building, whilst renting the others out. However, it’s essential to get the right type of mortgage in this instance, and to be aware of the potential pitfalls that could hinder the mortgage application. As the process can be more complex than with regular mortgages and with far fewer lenders in the market, it’s highly advisable to work with a specialist.

What sort of mortgage do I need?

A mixed use residential mortgage allows the owner to live in the main building, whilst renting the others out. Strictly speaking, a mixed use residential mortgage is not the same as a holiday let mortgage. The former is a regulated residential mortgage with the added clause that the owner is permitted to rent out the smaller units on the grounds. The general mortgage route is the same; it is assessed in the same way that a residential property would be, rather than taking into account holiday letting and potential rental income.

There’s a key difference here to holiday let mortgages, where the property’s projected rental income must be provided to the lender as evidence to assure the mortgage payments can be paid. With mixed use residential mortgages, the applicant doesn’t use the estimated rental income of the smaller buildings as evidence towards their income.

Let’s look at the following example:

We have a mortgage applicant who wants to purchase a £1million property (consisting of a main house and two smaller units in its grounds) and has a low personal income. The applicant believes that they can get a projected rental income for the smaller units, which will be run as holiday lets, and use this figure to help their mortgage application. In other words, combine their current annual income to the estimated rental income, to result in a figure that’s much bigger and more appealing to the mortgage lender. Unfortunately, it doesn’t work like this, and lenders won’t accept such applications, even if the figures are verified by a reputable holiday letting agency.

The lender will want to assess the application based on the applicants current personal “earned” income, and will ignore any rental from the holiday let units.

What type of multi-unit property is mortgageable in this way?

The important thing for lenders is whether or not the property is deemed to be residential or commercial and there is some clear guidance provided to lenders to help them make this assessment.

• The 40% rule: mortgage lenders look for certain criteria to be met to deem a property as residential, including the important 40% rule. This means that the space allocated as the main residential building must comprise at least 40% of the overall plot size. In the situation where the holiday let units exceed this – for example, if there were three large holiday homes and one small main house which only makes up 30% of the plot – the situation would be considered by lenders to be too commercial.
• Property or plot size: mortgage lenders won’t accept properties or plots that are too big. If the site is large with many holiday units (as a general guide we’d say three) and other outbuildings, the situation would be considered commercial. Lenders would also be wary if there’s the potential for other commercial activities such as renting out fields for events or renting out solar panels to businesses.  

The risk to the lender in both cases would be if they had to repossess the property. In the situation where the lender was left with a huge plot complete with a number of large properties or operations, it could be much more difficult to sell on. The key things to look out for are the 40% factor as well as the number of lettable units, where generally a maximum of three would be accepted by the lender.

What sort of finances do you need?

Mixed used residential mortgages will need to tick the same boxes as regular residential mortgages, in that lenders will conduct a full affordability test. This calculation means that the mortgage provider will generally loan 4.5-4.75 times more than the applicant’s annual income.

In figures:

An applicant earns £100,000 per annum. They could expect a lender to loan up to £475,000.

An applicant earns £50,000 per annum. They could expect a lender to loan up to £237,500.

Mortgage lenders will assess a person’s income against what they could realistically pay towards their mortgage each month. For example, the applicant earns £100,000 but already has a huge number of outgoings per month with little cash left over, and buying this new property would incur a steep monthly mortgage bill. In this case, the lender might deem the situation as too risky, as there’s a higher chance that the applicant would fail to meet their monthly mortgage payments.

What next?

If you’re hoping to get a mixed use residential mortgage, we’d advise speaking to an expert, such as HCM, to check yours and the property’s eligibility. We have experience working with those select mortgage providers who will loan to mixed use properties and can help you to navigate the process.

NB: it should be noted that mixed-use is different from multi-unit. The latter occurs when you have numerous buildings on one freehold title, but the owner rents each of the properties out commercially and doesn’t live on site. We have spoken about multi-unit properties here.