One of the fundamental concepts in property financing is the Loan-to-Value ratio (LTV). The LTV ratio is a measure used by lenders to express the ratio of a loan to the value of an asset purchased. It is a critical determinant in serviced accommodation mortgages as it influences the amount of capital an investor can borrow relative to the property’s value.

For serviced accommodation mortgages, LTVs typically range from 65% to 75%. This means that lenders are generally willing to finance between 65% and 75% of the property’s purchase price or value. For example, if a property is valued at £500,000 and the lender offers a 70% LTV, the maximum loan amount would be £350,000. The investor would need to provide the remaining £150,000 as a down payment.

Higher LTV ratios are advantageous for investors as they reduce the initial capital outlay required. However, lenders offering higher LTVs may impose stricter lending criteria and higher interest rates to mitigate the increased risk. It is essential for investors to balance the desire for a higher LTV with the financial implications of potentially higher borrowing costs.

One of the appealing aspects of serviced accommodation mortgages is that prior experience in property investment is not always a prerequisite. While traditional buy-to-let mortgages often favour seasoned landlords with a track record of successful property management, many lenders in the serviced accommodation market are more accommodating.

Lenders recognise that the serviced accommodation sector is unique, with its own set of dynamics and revenue streams. Consequently, they may be willing to work with novice investors, provided they demonstrate a robust business plan and a thorough understanding of the serviced accommodation market. This inclusivity makes serviced accommodation an accessible investment option for those new to property investment.

However, first-time investors must be prepared to present a comprehensive and convincing proposal to potential lenders. This includes detailed financial projections, market analysis, and a clear strategy for managing the property. Demonstrating knowledge and preparedness can significantly enhance the likelihood of securing financing.

In some cases, buy to let mortgage lenders may assess affordability using the market AST rental income. This method evaluates the rental income that could be generated if the property were let on a long-term basis, typically through an Assured Shorthold Tenancy (AST). The AST rental income is generally lower than serviced accommodation income, which can create affordability challenges for high-value properties.

For instance, a property that can generate £4,000 per month from serviced accommodation might only yield £2,000 per month under an AST. If a lender bases its affordability assessment on the lower AST income, the investor might qualify for a smaller loan amount, potentially limiting their ability to finance high-ticket value properties.

For serviced accommodation mortgages, lenders often base their affordability assessments on the anticipated income from short-term lets, we mostly see this method with Commercial Buy to Let mortgage lenders. This approach acknowledges the typically higher rental yields that serviced accommodation properties can achieve compared to traditional long-term rentals. Lenders may require detailed projections of occupancy rates and nightly rates to estimate the potential income.

This method is advantageous for investors, as the higher income potential from short-term lets can support larger loan amounts. However, lenders will scrutinise these projections carefully, considering factors such as location, demand, and seasonality. Accurate and realistic income estimates are crucial to passing this affordability assessment.