Guide: Holiday Let Interest Only Mortgages

Interest only mortgages for holiday lets are complicated and can be difficult to navigate. In this article we will explain the difference between interest only mortgages and repayment mortgages, discussing the pros and cons for buyers in our comprehensive guide.

How holiday let interest only mortgages work

If you get an interest only mortgage, your monthly payments will only require you to pay the interest on the loan and not any of the capital. It is only when you reach the end of your mortgage contract that you will need to pay back the original loan, which will be the same amount that you borrowed from your mortgage lender at the start.

There are various options for the repayment of the loan, depending on your personal circumstances:

• Sale of the property itself
• Money from savings or investments such as shares or ISAs
• Money that you’ve earnt over the years from your rental property
• Money that you’ve received from selling another property

Being an investment property, the most common repayment plan for a holiday let mortgage is the sale of the property itself. If your repayment strategy is centred on accumulating savings, you may be asked by your mortgage lender to provide proof that this is a viable option, and the lender will most likely consider your affordability position. The same is true if you propose property sales or investment ISAs as a means to pay back the capital; you will have to provide evidence to your lender that you own such assets and their value is sufficient to repay the mortgage.

What is a repayment mortgage?

If you take out a repayment mortgage, your monthly payments will see you paying back the interest on your loan, on top of part of the original loan too. So, when you reach the end of your mortgage contract, the entire loan you borrowed from the mortgage lender will have been paid off in full.

Differences between interest only mortgages and repayment mortgages

With interest only mortgages, your monthly payments will be much lower. That being said, you would need assurance that by the end of your mortgage contract, you would be in a position to pay the lender all that you owe. For example, if you originally borrowed £200,000 over 25 years, you would end with a bill of £200,000 still to pay.

With repayment mortgages, you will be facing higher monthly payments, but by the end of your mortgage contract, you will have paid off your initial loan in full. So, even if you originally borrowed £200,000, you would end up owing nothing and owning your property outright.

In figures:

Type of mortgage	Amount borrowed from the mortgage lender	Interest rate	Mortgage length	Monthly payments
Interest only mortgage	£200,000	4%	25 years	£666
Repayment mortgage	£200,000	4%	25 years	£1,055

Can I get an interest only holiday let mortgage?

Yes! In the same way that you can get a buy-to-let interest only mortgage, there is the option to get an interest only holiday let mortgage. However, the mortgage lender will need assurance that you will be able to repay their loan, in full, when you reach the end of your mortgage contract. This means you should have a solid business plan and repayment plan in place, or else the lender might deem the situation too risky.

What are the advantages of holiday let interest only mortgages?

The main advantage of getting an interest only holiday let mortgage is clear; your monthly payments will be much lower than with a repayment mortgage. This knowledge can provide comfort when you buy your holiday home, as it’s impossible to completely predict how successful it will be over the course of a year. If you run into financial constraints or don’t attract as many guests as you’d expected, it’ll be a huge relief if you aren’t facing mammoth mortgage payments each month.

Voluntary overpayments

It’s key to note that with most interest only mortgages, you may be allowed to make voluntary overpayments of capital each year, subject to a maximum cap of around 10%. Put into figures, if you have a £200,000 loan, you could over-pay up to £20,000 during the first year, if your financial situation allows it. The following year, with £180,000 of capital remaining, you could over-pay up to £18,000, and so on, throughout the remainder of your mortgage contract.

Paying back your capital using this method gives you the effect of a repayment mortgage, but the advantage is that it’s on a voluntary basis and you aren’t obliged to make payments if you can’t afford to.

If you choose to over-pay your interest only mortgage, you should be careful not to exceed the early repayment charge limit, which is usually around 10%. If you do go over this limit in a year, you might be liable to pay hefty repayment charges, which you will definitely want to avoid, so please read your mortgage contract very carefully!

What are the disadvantages of holiday let interest only mortgages?

Because you won’t have been paying off any of the capital, you won’t own your property at the end of your mortgage contract but instead, owe a large sum of money. As a result, mortgage lenders will need to see proof that you have a repayment plan in place and they won’t lose out.

Can you change from interest only to a repayment mortgage?

In most cases, you will be able to change your mortgage type during the course of your contract. If you switch from interest only to repayment, your monthly payments will increase and so mortgage lenders will want to know that you’re able to afford the new cost.

The reason for changing mortgage is likely to be because of a shift in your financial situation. This could be receiving an inheritance, for example, or getting a rise in rental income as the years go on. In both cases, with more money at your disposal, it makes sense to change mortgage and repay some of your property’s capital as you go, rather than in one lump sum at the end of your contract.

How to get your interest only holiday let mortgage

To get an interest only mortgage, you will need to find a lender who offers such a mortgage type. As we’ve made clear across our website, holiday let mortgages are more complicated than regular residential or buy-to-let mortgages, and there are fewer lenders in the market.

What do lenders want to see?

• Holiday let mortgages generally require you to have a larger deposit than standard mortgages, and the same principal is true for interest only mortgages; lenders will want to see that you can put down a substantial deposit.
• With interest only mortgages, as you will end up with a large amount of capital owing, lenders will prefer to see evidence of a good annual income. This will help to convince them that you’ll be able to pay off the money at the end of your mortgage contract.
• As we’ve discussed, you should have a solid repayment plan in place. Lenders will want proof that you will be in a position to pay back the full loan amount by the end of your contract, or else they will deem the situation too risky to lend to.

How to compare interest only mortgages

It’s always important to do your market research and compare mortgage products before you apply to a lender, to ensure that you get the best possible rates. You can use a price comparison site to browse possible lenders and then apply directly to a lender, or else you could use the services of a mortgage broker to do the hard work for you!

How to apply for an interest only mortgage

Considering the two application routes – either directly via a lender or via a broker – we’d strongly recommend that you use the latter when applying for your interest only holiday let mortgage.

At HCM we have extensive, up-to-date knowledge of the market and the best mortgage rates available, as well as boasting established relationships with those mortgage lenders who are willing to loan to holiday let properties. Whether you opt for an interest only mortgage or repayment mortgage, we can help you throughout the entire process, reducing the risk of failed applications and wasted time.

To get started, use our online calculator or fill out our initial assessment form.