Competition hots up in holiday home loans

New mortgage deals for holiday home buyers, alongside low interest rates and currency swings in the eurozone, are providing a boost for Britons seeking second properties for leisure or lettings.

Market Harborough Building Society this week launched a new mortgage loan aimed at second home and holiday let buyers. The lender is offering a five-year discount of 1.5 per cent on its standard variable rate, which currently stands at 5.49 per cent.

It allows buyers to let a UK property for 15 weeks a year, as well as for their personal use, and is available to buyers with a deposit of at least 25 per cent of the property value.

Mortgages which allow buyers both to rent out and live in a property are relatively unusual. UK lenders prefer to offer residential mortgages with provisions against renting; or buy-to-let mortgages that prevent the borrower from living in the property.

Aaron Strutt, product manager at mortgage broker Trinity Financial, said holiday lets were generally classed as buy to let properties and very few lenders allowed owners to live there, even for a short period. "Market Harborough's product provides a good halfway house."

Smaller lenders dominate the niche, with rival products on offer from Principality, Bath, Leeds and Cumberland building societies. For buyers with a deposit of at least 40 per cent, Principality offers one of the best-value holiday let mortgages: a rate of 2.4 per cent, fixed for two years, with a £994 arrangement fee. Leeds offers a fixed rate of just under 3 per cent until 2017, then a 1 percentage point discount off its variable rate at 4.99 for the next three years, moving to the variable rate after that.

Cornwall has been a recent hotspot for the overwhelmingly British buyers who were seeking a rural bolt-hole, said William Morrison, partner at the Exeter office of agent Knight Frank. "This year there's been a lot of activity in Cornwall compared to previous years . . . particularly the prime waterfront locations." He added that activity was expected to die back over the next six weeks, picking up after the May general election.

But the UK market is up against tough competition from the eurozone, where a combination of economic factors has ignited interest among potential British buyers.

Home buyers have been galvanised by sharp falls in the euro against the pound in recent months, giving an immediate boost to their purchasing power on the Continent. At the same time, interest rates on euro mortgages have fallen to record lows. UK borrowers seeking French property, for instance, can get a typical 20-year fixed rate mortgage for as little as 2.35 per cent with a deposit of at least 20 per cent.

However, buyers should note the French mortgage system observes no distinction between residential and buy-to-let home loans: affordability of all mortgages, whether for owner occupation or renting, is judged according to the buyer's income.

John Busby, managing director of broker French Private Finance, said the company had handled as much business in the first three months of 2015 as in the whole of 2014. "If you're British and buying in France it's become 20 per cent cheaper for you in the past six months."

Mr Busby pointed to the announcement of eurozone quantitative easing as a further motivating factor for buyers, since the large-scale asset-buying programme by the European Central Bank stands to push up property values in the medium to long term. Some buyers of ski properties had redirected their attention from Switzerland to France and Italy, he added, after the Swiss central bank scrapped the franc's peg to the euro in January.

While French rates are at record lows, other eurozone countries have also seen falling mortgage interest rates. Conti, an overseas mortgage broker, said loan rates in Portugal had been cut by up to 1.5 percentage points this month, starting from 3.35 per cent for a variable rate loan with a deposit of at least 30 per cent.

Lenders in the country are making concerted efforts to attract overseas buyers after years of falling prices and stagnation. Clare Nessling, director at Conti, said: "The reduced cost of funding together with continued interest from Portuguese lenders to assist non-residents to buy property means that deals are becoming cheaper." Conti said the number of enquiries it received in January and February was 40 per cent higher than the same period in 2014.

Renewed interest in the holiday homes market comes as the Bank of England this week reported a six-month high in mortgage approvals, up by just over 1,000 to 61,760 last month. Economists said the third successive monthly rise suggested the cooling trend in the housing market had bottomed out. Approvals nonetheless remain well below their January 2014 peak of 75,453.

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