How to finance your holiday rental

If you want to invest in a property in Spain and are considering the option to let it out as a holiday rental; either to cover some of the costs, or as a full-time business, you first need to research the various choices available, in terms of financing the property. chatted to UK-based overseas mortgage expert, Simon Conn, about the options for buy-to-let financing, what you need to watch out for and what financial institutions will be looking for.

Buy-to-let overseas mortgages  

What financial options currently exist for clients looking to buy a holiday rental property?

At present you are able to secure a Repayment (capital & interest) or on a case-by-case basis, you may be able to secure an Interest-only mortgage. Interest-only products tend to have a lower percentage loan-to-value.

What are lenders looking for as gross rental income vs. mortgage payments?

You should be covering at least 115% and ideally, your rental income would cover 125% of the mortgage payments.

Can owners deduct mortgage payments or interest from their yearly tax payments?

It depends what country you are operating in. In Spain, you can deduct the interest and amortisation on your mortgage, if you hold a residency. However, I strongly recommend buyers check with their lawyer or a tax expert to understand the local tax law. Read more on this in our article, Declaring the tax on your Spanish holiday rental.

Is it worth opting for a specialist buy-to-let mortgage? What benefits are there, if any?

At the moment Buy-to-let type products are only available for property purchased within the UK. If you’re buying a property to let outside of the UK, you can apply for a mortgage in the UK, but the lender won’t take your rental income into account during the application process. 

Essential questions a prospective buyer should be asking the lender?

  1. Interest rates: Start from around 3.00% variable. This is your starting point and you should be achieving a rate as near to the bottom rate as possible. 
  2. Setting up costs: Lender’s arrangement fees are generally around 1% of the mortgage. Make sure you are paying over the odds 
  3. Valuation and legal fees: The valuation fee works out around 0.1% of the purchase price. Legal fees vary depending on purchase price/loan, you’ll need to negotiate this with your lawyer. Do your homework, it’s recommended you get a couple of quotes before you decide which lawyer to work with. 
  4. Early redemption penalties: Vary from 0% to 1% of the outstanding balance, depending on the lending scheme. 
  5. Speed of transactions: This will depend on how quickly the buyer returns the completed application forms and requested supporting documentation. A valuation will then be carried out. You should allow at least 6-10 weeks for the legal process to complete,  although it could be quicker depending on your situation. 
  6. Is building insurance or life assurance compulsory? Building insurance is generally provided by the lender, if it’s not, you will need to take it out with an insurance provider during the mortgage process. Life assurance may not be compulsory, but it’s advisable to take cover if possible. 

Is it better to secure a mortgage in the country of purchase, or in your home country?

Choose the financial product that is the most competitive and offers the best tax benefits and advantages; whether it’s in your home country or country of purchase. 

If a lender is arranging a mortgage on an overseas property, they will check the risk and how secure the purchase is. For example they will check if the property has a valid title, legal ownership documents and licences are in place, and the true value of the property in today’s climate. 

If you decide to pay in cash, using your first property as security, make sure you take independent legal advice and get a valuation carried out.  

Are mortgage lenders more likely to offer you a mortgage on a new build or second-hand property?

They will lend on either type of property, but may lend a lower loan to value on a new build and not offer stage payments (especially on apartments). 

If a client is thinking of buying an older property to rent out, will the mortgage lender now expect to see building licences?

A buyer shouldn’t wait for a lender to check if a property is legal. Checks to make sure both building and planning permission licences are in place should be done before you make any offer on a property, especially if it’s a new-build. 

Lenders will definitely require these and will ask to see original documents from your lawyer. If you find yourself in a situation in which a property you wish to purchase doesn’t have legal documents, then it’s advisable to seek independent advice from a lawyer, who is not connected with the sale of the property.

Is there a minimum deposit required for securing a mortgage on your holiday rental?

UK buy-to-lets - max  75%-80% loan-to-value 

France - max 80%-85% loan-to-value

Italy - max 60%-70% loan-to-value

Portugal - max 70%-80% loan-to-value

Spain - max 60%-70% loan-to-value

USA - max 70%-80% loan-to-value - will vary from state to state

*All the above are subject to a client’s personal financial profile and the property valuation.

Who are the main mortgage lenders now offering good products for buying-to-let overseas?

Not revealing, sorry! 

Actually products change, rates fluctuate and each case is unique with particular requirements. I would advise getting in touch with a regulated independent financial advisor, when you are ready to purchase, who will make a study of your case and the best product for you.


About Simon Conn:

Simon ConnWith over 30 years established experience, Simon Conn, has become a highly respected commentator for the overseas property and finance sector, regularly featuring in the British media. 

In recent years Simon has appeared in The Telegraph, Daily Mail and on BBC radio and provides consumer advice to industry publications such as Mortgage Strategy and OPP.