For savvy property investors with a stake in the lucrative SA/STR and Airbnb market, the big question is: how will you finance your next property purchase? Fear not as there are a range of funding options available to you. And of course, if you are a first time entrant to the market, these options can also apply to you too.
Let's start with some home truths - the market for bank loans and mortgages specifically for Airbnbs and Serviced Apartments is not as vast as if you're looking to buy your main home with a residential mortgage. This is because there are more associated risks for the lenders which can make access to these products a bit trickier.
Lenders are more cautious about short-term rental properties because you're responsible for constantly renting out the space to keep income flowing. Compare this to traditional Buy to Lets where tenants can be place from 12 months to 3 years+. If you can't find tenants for a few weeks or months in your STR/SA, you may not have the money to pay back the loan. And then there are the risks associated with managing an Airbnb type property. For example, there's a chance a guest could damage the property causing you to lose income while you make repairs. Additionally, it's heavily linked to the travel industry which can peak and trough (e.g. COVID) and means added uncertainty around future demand for short-term rentals - this can make it harder to be eligible for their mortgage products.
Now with that out of the way, let's get to the good news. You do have options, even if it's your first one! Here are the most common ways to buy your first or next property:
1. The Holiday Let mortgage.
This is the most suitable bank product for our purposes. We note that most lenders' minimum requirements include being 21+ and already owning a residential property or other property asset (lenders like a bit of skin in the game). Beyond that, lenders are looking at the down payment available (typically from 25-30%+) and the expected rental income as a proportion of the expected mortgage payment (known as the stress test). While the stress test will vary by lender and type of property as well as your deposit, your expected monthly rental income may have to meet between 125-150% of the monthly mortgage payment.
Worth adding that buying an existing holiday home / STR could help your application further - you can get the previous years' trading history and evidence its earning potential. You can of course purchase a new home for the STR/SA market (or maybe refurb/convert it to be so), but lenders will finecomb the title deeds of the property to ensure it does not restrict any short term letting. The Airbuy and Sell marketplace features active Airbnbs and holiday Lets, as well as leasehold properties with suitable STR clauses, so you can increase the chances of your property being suitable for a holiday let mortgage.
2. The Residential mortgage.
If you're planning to stay in part of the property yourself i.e. use it as your main home and rent out some of the rooms partialy throughout the year, a residential mortgage could be the way to go. It's a more affordable option and the simplest. Deposits typically start from 10% but can be lower, and you can also enjoy longer terms up to 30 years+. You'll still need to ensure that you adhere to relevant regulations around short-term rentals in your area and for the property itself.
3. The Buy to Let mortgage.
It's a popular choice for many investors, especially if you're just starting out. With competitive rates and terms, this type of mortgage is designed specifically for rental properties, but crucially mostly for Long Term Lets. Deposits typically start from 25% here. If you are planning to use it for short term lets from the off, be aware that there may be restrictions on the minimum length of stay for each guest or the maximum number of days you can rent out your property on a short-term basis each year. It's worth noting that the Airbuy and Sell marketplace features the predicted long term rent on a normal BTL tenancy, so you may initially consider this as the primary purpose for buying the property.
4. Secured commercial term loans
For those with established STR/SA companies, business finance may be an option. Here you can use the value of the property you are buying as collateral as well as existing properties in your portfolio (through refinance) to raise the necessary sum. This is particularly useful when you are short on the deposit. This makes it a great option for those that are more asset rich and cash poor. Further, your own trading performance to date can further boost a lender's confidence in providing the funding. Note these products may not be as competitive rate wise as residential and BTL mortgages, and their terms may be shorter so your monthly payments will be larger.
If you've found your target property and are ready to cobble together the finances, check out our list of Holiday Let specialist brokers who can help you get the funding you need. They can guide you through the process, from finding the right financing options to understanding deposit requirements and making sure you comply with relevant regulations.
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