Sometime over the next few weeks many of us will pack our bags and head off to a rural retreat, or fly abroad in an attempt to find some sun.
While away, many people will become so enamoured with their new surroundings they will be tempted to buy a property in the area; enabling them to come back time and again and ‘ if they are lucky ‘ make a bit of money by letting it out when they are not using it.
Of course, once home, most people forget about this as they fall back into their normal routines. But for some who do not want to risk their savings on the stock market, or are fed up with ploughing good money after bad into a pension that goes down in value rather than up, then buying a holiday home will remain an attractive alternative investment option.
To the uninitiated, buying a second property would appear to be a relatively straightforward process. However, it is more complicated than most people would imagine. The objective advice and guidance brokers can provide will prove invaluable in helping prospective owners of second properties to secure the mortgage and insurance cover they need.
A part-time home
The first point a purchaser needs to appreciate is that buying a second property is not the same as buying a home to live in full-time. Lenders and insurers view the purchase and ownership of holiday homes in much the same way as buy-to-let properties ‘ it is a far riskier proposition than lending on a first property.
An important issue an adviser can help clarify is the client’s motivation for buying the property. Any purchase should be entered into on the basis it is a long-term commitment. The client needs to be sure they will be happy returning to the same place year after year. If they intend to let the property out, they will also need to give more serious consideration to the location and type of property they purchase, than if it were just for their own use.
The Cotswolds enjoys the strongest demand for holiday lets and is followed in order of popularity by the Lake District, Dorset, the Yorkshire Dales and the Peak District. Detached cottages or houses make the best rental investments while apartments usually attract the lowest occupancy rates unless they are situated within a heritage city centre such as York, Bath or Edinburgh. If a client wants to buy a property near the coast, then for rental purposes a sea view is a must.
Clients should appreciate that if they decide to purchase a less popular type of property in a secondary location, it may be difficult to let. This could be important if they are relying upon the income from lettings to help pay their mortgage.
Finding the right mortgage
Once the right property has been found, then the next step will be to obtain a mortgage. Usually, lenders will be looking for the borrower to provide more security for a second home than they would for the purchase of a main residence. For example, some lenders will require their loan to be secured against an existing property, while others will impose stricter loan to value conditions on any offer.
Lenders do not appear to take a consistent approach. Some will only lend 50% of the value of the property while others will lend up to 80%. Depending upon how often the property will be let out, lenders will push an applicant towards a buy-to-let product, or if letting it out will be limited to immediate family and close friends, then borrowers might be able to choose a mortgage from their standard product range.
The options available (both in terms of products and rates) to fund the purchase of a second property, underline why an intermediary’s market knowledge and contacts will be invaluable in helping a client find the most appropriate mortgage.
Insurance is another issue that needs to be investigated thoroughly. The holiday home insurance market is not big and in general larger insurers are not keen to cover holiday homes. For example, Norwich Union will provide household cover for a second property only if a main residence is also insured with them.
Insurers regard second homes as a poor risk ‘ and it is not hard to see why. The owners are rarely there, they can be unoccupied for long periods which makes them a sitting target for burglars, and when they are occupied they might be let out to holidaymakers. Tenants ‘ in particular temporary ones ‘ do not always treat a property as carefully as the owners would.
On the whole, insurers are more likely to agree to provide cover for a property if it is only used by the owner’s family. However, some insurers, such as Ocaso and Axa, will provide standalone cover for properties irrespective of whether the owner’s main residence is insured with them, or who will use the property. But you might not be surprised to hear this cover comes at a price.
In general, holiday home insurance is more expensive than normal household cover. Building insurance is usually around 25% dearer while contents cover can be up to 60% higher. Although buildings and contents policies can be bought from separate insurers, it is normal practice to purchase cover from the same company.
Buildings policies, as with a standard household policy for a main residence, typically cover damage caused by fire, flooding and lightening as well as landslip, subsidence and heave to properties in the UK, although not necessarily for overseas homes. Contents insurance will usually cover accidental damage to the main contents of the home such as furniture and electrical appliances. It is not unusual for the insurer to consider each application on a case-by-case basis.
All holiday home policies have a range of special conditions which must be adhered to if the cover is to remain valid. When it comes to insuring a holiday home, the best advice is to read the small print and note any policy exclusions.
Special conditions are likely to include requiring the owner to fit adequate security measures such as window locks, five lever mortise locks on the main doors and possibly an alarm. If the property is unoccupied, some insurers insist it is visited every two months, that electricity and water supplies are turned off and in winter they may require the heating to be switched on at regular intervals.
The level of excess on holiday homes policies can vary from £50 to £250 and it is important to check the owner is covered for loss of rent if they are unable to let the property out in the event of a fire or other accident. In addition, while all holiday home insurance products include public liability cover, it is important to ensure the cover provided is a minimum of £1m.
Property owners must also ensure they comply with legislation affecting self-catering accommodation. There are strict fire safety regulations regarding upholstery and laws governing electrical and gas appliances. Properties will also need to be fitted with fire extinguishers and smoke alarms.
Renting it out
Once the right insurances have been put in place, if the property is going to be let out, then the owner needs to think about securing bookings. It often makes financial sense to place it with a letting agency. A committed agent will advise on the right price to charge and should achieve higher booking levels than an owner could on their own. In exchange for a reasonable commission, they will promote the property, handle enquiries and collect payments, leaving the owner free to concentrate on maintaining the property. Unless they have plenty of spare time, an agency should reduce the stress involved.
There is no doubt that owning a holiday cottage can be a rewarding experience. There is a huge market for well-furnished, comfortable properties in quiet rural areas. Although these desirable properties are not cheap to purchase, they can ‘ when let out ‘ generate a worthwhile income which will cover loan repayments and other costs associated with owning the property.
The holiday letting market should not be entered into lightly. Clients need good advice and to act on the advice they receive if their investment is to perform as well as it should. Advisers who specialise in this area should do well. There are around 220,000 second homes in the UK and it is a niche market likely to see significant growth over the next few years as people who have lost faith in the stock market put their trust in bricks and mortar.
David Quick is managing director of CETA
Demand for holiday lets is highest in the Cotswolds, followed by the Lake District and Dorset.
Lenders have an inconsistent approach to holiday homes ‘ with required loan to values varying between 50% and 80%.
Buyers must be aware insurers regard second homes as a high risk and cover will be expensive.