Serviced apartment mortgages
Serviced Apartment Mortgage options have gained significant traction in recent years, with lenders now having flexibility on affordability with some using the low-medium-high booking figures rather than what the property would rent out for as a long term rental. This guide delves into the intricacies of serviced apartment mortgages, including loan-to-value ratios (LTVs), the role of experience, the positioning of these mortgages with lenders, and the specific considerations in areas like London.
Loan-to-Value Ratios (LTVs) in Serviced Apartment Mortgages
Loan-to-value ratio (LTV) is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. It is a critical factor in determining the amount a lender is willing to lend against the value of a property. For serviced apartment mortgages, LTVs can vary but typically range between 65% to 75%. This means that an investor would need to provide a deposit covering 25% to 35% of the property’s value.
The LTV ratio influences not only the amount of money that can be borrowed but also the interest rate of the mortgage. Higher LTV ratios usually come with higher interest rates, reflecting the increased risk to the lender. Conversely, a lower LTV ratio can secure more favourable interest rates, making the investment more profitable over the long term.
Experience Not Required | New Investors
One of the significant advantages of serviced apartment mortgages is that prior experience in property investment or management is not always a requirement. Many commercial buy to let mortgage lenders understand that serviced apartments can be an attractive entry point for new investors, some may just want a good income. As such, they offer products tailored for individuals with no prior experience. However, having a well-documented business plan and demonstrating an understanding of the serviced accommodation market can enhance an investor’s application.
Placement with Commercial Buy-to-Let Mortgage Lenders
Serviced apartment mortgages are typically placed with commercial buy to let mortgage lenders rather than traditional high street lenders. The primary reason is that commercial lenders base affordability on the rental income generated by the serviced accommodation rather than a standard Assured Shorthold Tenancy (AST) rental income.
Affordability Based on Serviced Accommodation Rental Figures
Commercial buy to let mortgage lenders assess the affordability of serviced apartment mortgages by examining the potential rental income from the property. This income is often higher than standard AST rental income due to the premium rates that serviced apartments can command, especially in high-demand areas. By focusing on serviced accommodation rental figures, these lenders can justify higher loan amounts, making it feasible for investors to purchase high-ticket properties.
Challenges in High-Value Areas like London and Manchester
In high-value property markets such as London and Manchester, the disparity between serviced accommodation rental income and standard AST rental income becomes particularly pronounced. While commercial lenders consider the higher income potential from serviced accommodation, some buy-to-let lenders may still base their affordability calculations on market AST rental income. This approach can create affordability issues, as the rental income under an AST may not be sufficient to cover the mortgage payments for high-value properties.
Investors must carefully select lenders that recognise the higher income potential of serviced apartments to avoid these affordability issues. Engaging with brokers such as Mortgage Lane who specialise in serviced apartment mortgages can provide valuable insights and access to lenders who understand the unique dynamics of this market.
Airbnb and Serviced Apartment Mortgages
Airbnb has revolutionised the short-term rental market, providing a platform for property owners to rent out their properties on a short-term basis. Many commercial buy to let mortgage lenders permit the use of Airbnb as part of their serviced apartment mortgage offerings, recognising it as a viable and often lucrative letting strategy. However, this is not universally accepted, as some high street lenders generally do not approve Airbnb as a letting strategy due to perceived risks and regulatory concerns.
The 90-Day Rule and Its Impact
One of the regulatory considerations investors must be aware of is the 90-day rule, particularly enforced in London. This rule restricts property owners from renting out their homes for more than 90 days a year on a short-term basis without obtaining specific planning permission.
The 90-day rule aims to balance the interests of short-term renters with the housing needs of long-term residents. For investors, this means that exceeding the 90-day limit without proper permissions can lead to significant fines and legal challenges. It’s crucial for investors to plan their letting strategy around this regulation to avoid potential pitfalls.
Implications for Investors
The 90-day rule significantly impacts how serviced apartments can be managed in areas like London. Investors must either limit their short-term rentals to 90 days or seek planning permission to extend this period. This can affect the overall profitability of the investment, as the income generated during the permitted period must cover mortgage payments and other expenses.
Moreover, understanding local regulations and how they apply to serviced apartments is essential. For example, Manchester does not currently enforce a similar 90-day rule, providing more flexibility for investors in terms of rental duration. However, local regulations can change, so staying informed and compliant is key to a successful investment strategy.
QUESTIONS ON SERVICED APARTMENT MORTGAGES
A serviced apartment mortgage is a type of loan specifically designed for financing properties intended to be rented out as serviced apartments or short-term rentals.
Eligibility criteria typically include a good credit score, proof of income, a viable business plan, and sometimes, a certain level of cash reserves. Experience in property management is not always required.
The application process may require additional documentation, such as a business plan and rental income projections, and lenders may assess affordability based on potential short-term rental income.
Local regulations can impact rental income potential and the overall viability of the investment. Lenders consider these regulations when assessing affordability and may require compliance as a condition of the mortgage.
Serviced apartment mortgages are tailored for properties used as short-term rentals, with affordability often based on potential rental income from serviced accommodations rather than standard AST rental income.
Both experienced and novice property investors can apply for a serviced apartment mortgage, provided they meet the lender’s criteria, including credit score, income verification, and deposit requirements.
Deposits for serviced apartment mortgages generally range from 25% to 35% of the property value, though this can vary based on the lender and the investor’s financial profile.