Holiday Let Remortgages: The Complete Guide

If you own a holiday let property and want to remortgage, depending on what you want to do, it might come as a surprise to find that things could be a little trickier than you first imagined!

We tend to see people wishing to remortgage for one of the following two reasons:

• They don’t presently have a mortgage on the property (either they paid cash for it originally or they have paid off their mortgage in full), but now want to raise new funds.
• They have an existing mortgage but wish to replace it. This could either be a ‘like for like’ mortgage to simply to get a better rate, or a bigger mortgage to raise new cash funds at the same time.

If the purpose of the remortgage is just to replace an existing mortgage and nothing more, then the process can be pretty simple.

However, if the remortgage will result in extra cash being raised, then the mortgage lenders will look extremely closely at why you want to raise the money and what you plan on using the money for. This is known as ‘responsible lending’ and it is something the lenders take very seriously.

In this article we will fully explain what the different remortgage types are and how they work. We will also discuss what lenders examine when cash is being raised; clarifying the scenarios that they like and those that they dislike.

The different types of holiday let remortgage

With a remortgage, you always own the property and there are various scenarios.

Unencumbered remortgage

This is when the property has no debt on it at all. You might think, “Why is it a remortgage, why not a regular mortgage?” Well, because you’re not buying the property, it’s not a purchase; you already own it and so it has to be seen as a remortgage.

In this situation, we’re looking at a 100% capital raise. In other words, for every single pound that you are raising, you will be required to explain to the lender what it is for.

Case study

A couple inherited a holiday let many years ago, debt free, and it has been very successful. Now they want to buy another holiday let to grow their portfolio and wish to raise the deposit by remortgaging their unencumbered property.

Like for like remortgage

This is the most straightforward type of remortgage. You already have a mortgage on the property and will be simply replacing the mortgage balance with a new (hopefully better) rate.

Case study

Someone owns a £500,000 property and has a £250,000 mortgage; they want to remortgage that £250,000, like for like. They won’t be doing any capital raising at all. Instead, they will simply be swapping that £250,000 to get a better deal.

Sometimes this will be via a new remortgage with a different lender; sometimes this is by a process called a ‘product transfer’ with your existing lender (more on that later). You aren’t taking any extra cash out, so the capital raise is £0.

Capital raise remortgage

This is when you have a mortgage in place and want to raise more than that existing mortgage; the difference between the two amounts is known as ‘capital raise’. Just like with an unencumbered remortgage, every pound has to be explained to the lender.

Case study

Someone has a mortgage of £250,000 and wants to raise £300,000. They will use £250,000 from the existing mortgage, so the extra £50,000 is the capital raise.

Pro tip: be aware of the six-month rule

“Generally speaking, you won’t be allowed to remortgage until you have owned the property for six months”

The reason for this rule goes back to 2006/7, just before the credit crunch got really serious. A system of fraud emerged where developers who were building new flats and houses would manipulate the market price of the properties, leaving the mortgage lenders exposed. For this reason, mortgage lenders will not allow anyone do what’s called a ‘back-to-back remortgage’ within six months.

Example
A developer knows the real price of a property to be £100,000. They say to the buyer, “I’ll sell it to you for £200,000 but give you a gifted deposit of £100,000.” The buyer will obviously think they’re getting a great deal, only paying half of the price.
What the buyer would do is simultaneously, on the day they buy it, is to arrange a remortgage which is 90% based on £200,000. So, the buyer would get from the bank, on that same day, £180,000. £100,000 goes to the developer, leaving the buyer £80,000 in profit and a house.
In reality, the property was never worth £200,000 and suddenly, the mortgage lender is the one left in the lurch.

Remortgaging without raising extra capital

Let’s say that you have a £500,000 cottage in the Cotswolds, £250,000 mortgage on it, and you’re about to come to the end of your two-year fixed rate. If you don’t do anything then you will move onto the standard variable rate which will be huge; probably 5% or higher. So, it’s natural to feel a little nervous as you approach the end of your two-year initial period. You might have no need to raise capital but want to keep the mortgage cost-effective. Where it is a like for like mortgage – meaning you’re not looking to raise any capital, just replacing the mortgage you’ve already got – there are two main strategies to getting a new, great rate.

Search the market for a new lender

It’s a good idea to do a whole of market search to see if there’s a mortgage lender who can give you a better interest rate for your specific circumstances. Of course, we are able to help with this; searching through various holiday let lenders to find you the best possible deal.

This is a full mortgage process because you are applying for a new mortgage with a new lender. This means full disclosure; providing as much information as would be required when taking out a mortgage from scratch.

Apply for a product transfer with your existing lender

Doing a product transfer is something that you’ve probably heard of, but not really understood in detail. A product transfer is not a new mortgage; it’s you staying on the same mortgage contract, just moving to a better rate for another two or five years. As such, the process can be quicker and require less documentation. Even better, it can often avoid the need to use surveyors and solicitors and all those fees incurred by them!

Why is this? Because you are already a customer and already in a contract, so the risk is already there for the lender. Essentially, a product transfer is rolling your contract forward.

As a holiday let mortgage specialist, HCM can look at both whole of market and product transfer options for you, making sure you always get the best rate.

Remortgaging specifically to raise additional money – what is responsible lending?

Let’s consider a hypothetical situation: you have bought a holiday let property and paid the mortgage off in full, let’s say because of receiving an inheritance. Later down the line you regret this decision and decide to take a mortgage back out – simple, right? The answer is, maybe… but it all comes down to what you plan on doing with the money.

Responsible lending means that lenders have a legal obligation to ensure that funds raised are being used appropriately and to make sure they know where the money is going for anti-money laundering purposes.

There are lots of scenarios that a lender will not support as it raises a red flag for them, which could indicate that the person raising the funds is in financial difficulty and that is why they are desperately trying to raise cash.

Case study

Someone has their own limited company and it’s in dire straits and desperately needs a cash injection to survive. They own a holiday let property with no mortgage on it and so they approach a holiday let lender and ask, “I’d like to remortgage and raise £200,000 in cash.” The lender will ask what the money is to be used for and when they find out it’s to fund a failing business, they will most likely walk away. This is because, if the new money gets burnt through and the company is still in trouble, then that person is now in an even worse financial situation.

For this reason, trying to raise capital for business purposes will generally get a big ‘no’ from mortgage lenders.

Other situations that lenders tend to struggle with are listed below and is by no means exhaustive. Many of these won’t come as a surprise, but lenders will not want to give you money for:

• Divorce settlements.
• Gambling activities and debts.
• To pay an HMRC tax bill.
• Replenish savings (see below).
• Consolidation of short-term debt such as credit cards (again see below, as sometimes, lenders will accept this).

Replenish Savings

This is a tricky one, as mortgage lenders will want to know what you’re planning to do with your savings once you have topped them up. You will need to prove that there is no scope for fraud with the money. They want to ‘look through’ the idea of replenishment and see what you will actually do with the money; gambling or settling a huge tax bill will get a big thumbs down!

Generally speaking, replenishing savings is such a vague reason for remortgaging that the lender won’t allow it, except for certain circumstances when the applicant’s motives can be proved to be legitimate.

Debt consolidation

This is a bit like cholesterol – there’s a good type and a bad type!

The bad type

This is when you’ve got someone who essentially cannot afford to live within their means. Think of a person who is maxing out multiple credit cards and not making any monthly payments, taking out short-term loans, buying things on finance and so on, as their income just isn’t enough to cover their outgoings.

It gets to a breaking point where they may face going bankrupt and so as a solution, will remortgage their holiday let property to raise money. This money will then be used to consolidate their debt; essentially, taking the short-term debt and changing it into long-term debt. Typically, this is not allowed for holiday let mortgages as lenders expect holiday let owners to be squeaky clean when it comes to their personal financial situations.

The good type

This is when you have someone who is quite wealthy and living within their means, no problem. That being said, they have £50,000 of short-term finance. Why? They’ve used 0% balance transfers, free credit and so on. They wanted to buy a new kitchen, for example, and have been savvy in how they’ve used finance. Now they want to remortgage to raise money and pay off that debt, before they have to start paying interest. There’s nothing wrong with that at all – however, many lenders will take an overly simplistic view and say it’s the ‘bad type’ of debt consolidation.

In both ‘good’ and ‘bad’ circumstances, working with a seasoned professional in the holiday let market is absolutely key, as here at HCM we have handled many, many of these types of situation before.

So, what will lenders allow cash raise for?

Essentially, anything property-related! Here are some classic examples…

Paying off another mortgage

If you want to raise £250,000 of capital by remortgaging your holiday let, and the reason is to pay down your residential mortgage, that’s fine. It is seen as a sensible move, and it’s also easy to provide evidence to your lender; you can show records of your residential mortgage account. The lender will make it a condition that, on completion of the mortgage, the cash goes straight from your solicitor to the mortgage provider in question.

Home improvements

Mortgage lenders will be happy if you want to raise funds in order to build an extension or conservatory, for example. Generally speaking, lending money for any renovations will be allowed, whether they are intended for the holiday let or another property.

It should be said though, that the lender won’t want to see that major structural work has to be undertaken on the holiday let itself, as that would be damaging the security of their loan which is deemed too much of a risk.

Case study

Someone has no mortgage on their holiday let but wants to raise £250,000 by remortgaging, to almost knock the property down and rebuild it. The problem is that the moment the building is knocked down, the bank will be in trouble – after all, they own it!

Buying another holiday let

You can remortgage to buy another property; using the raised funds to form a deposit. This is very common, and lenders will be happy with the situation, especially as it is easy to prove where and how the money is being used.

Help – Covid 19 has ruined my rental income!

In a normal world, mortgage lenders would look at the last 12 months of rental income, which is normally evidenced via owner statements, or individual bookings delivered via Home Away or Airbnb, for example.

This information drives the Interest Cover Ratio (ICR) calculation and proves the affordability of the remortgage; in other words, how much lenders can give you, based on your rental income.

However, due to Covid 19 this is very difficult, as the various lockdowns have had a severe impact on holiday let owners and their number of bookings. To work around this issue, lenders are looking at the 12 months preceding March 2020 when the Covid 19 pandemic hit. If your holiday let wasn’t trading then or didn’t have a full 12 months’ trading, the mortgage lender will ask for a holiday letting rental projection letter from the holiday let agent.

How can we help?

If we haven’t made it clear, remortgages can be unexpectedly confusing! Lenders are surprisingly strict and could require an awful lot of information, not to mention proof, of your intentions with the raised capital.

We have seen all types of scenario and are on hand to help. We can scout the market of holiday let mortgage providers to find you one who allows your remortgage and gets you the best possible deal.

For more information, contact us or create an account and request your free, initial assessment, here.