When an Old Outbuilding Changed Everything: A Restricted Holiday Let Remortgage

The Client

Our clients owned a substantial detached home on the Cornish coast, run as a holiday let. They had bought it some years earlier with a mainstream holiday let mortgage, secured on what was then an ordinary house with unrestricted residential use.

The business was performing well, with strong annual letting income and a property valued at roughly twice the outstanding mortgage. The property was held in their personal names.

The Objective

Their existing fixed rate was due to end within a few months. They wanted to remortgage onto an interest only holiday let mortgage at a rate in line with the mainstream holiday let market, keeping their monthly costs broadly where they were.

On the face of it, with healthy equity and good income, this looked like a straightforward case.

The Complication

The initial enquiry mentioned that the clients had since converted an old outbuilding in the grounds into a second holiday unit, sitting on the same title deed as the main house.

Rather than take that at face value, we worked through a full fact find with the clients, covering the history of the property, the conversion and the planning position.

That process brought three issues to light:

• A holiday-only planning condition. The council had granted permission to convert the outbuilding on condition that the new unit was used for holiday letting only and never occupied as a permanent home.
• No lender consent. The conversion had been carried out without the existing lender being asked for, or giving, written consent.
• A single title. Because the converted outbuilding sat on the same title as the main house, any lender would have to take both together. The whole security now contained a restricted-use element.

Together, these meant the property was no longer the asset the original mortgage had been arranged against, and no longer one that a mainstream holiday let lender would accept.

How We Assessed Options

We set out what the clients were looking for against what the market could realistically offer once the restriction was taken into account.

Step 1: Mainstream Holiday Let Remortgage

Our first step was to review the mainstream holiday let lenders on our panel. Almost all of them exclude properties with occupancy restrictions from their standard products, and the shared title meant the restriction could not be separated from the main house.

Where lenders did have an appetite for more complex holiday lets, restricted-use cases were referred to their commercial teams rather than considered under their holiday let ranges. A mainstream remortgage was not available.

Step 2: Removing or Varying the Planning Condition

If the holiday-only condition could be lifted, the property would return to unrestricted residential use and the mainstream market would reopen. The clients approached the local authority to ask whether the condition could be removed.

The local authority confirmed it would not remove the restriction. In an area where protecting local housing is a priority, this was not unexpected, but it closed off the one route that could have solved the problem at its root.

Step 3: Specialist Commercial Holiday Let Lending

With the restriction staying in place, the remaining route was commercial holiday let lending, assessed on the trading performance of the business rather than residential value. Drake researched the market and identified a lender prepared to consider the property, including on an interest only basis.

The terms reflected the commercial nature of the security, with rates between 7% and 8.4%. On those figures the monthly cost was well above what the clients had planned for, and they told us it was not something they could sustain.

Identifying the Right Route

Our role was to make sure the clients had the full picture before their fixed rate ended, not to steer them towards a loan they were uncomfortable with.

We explained:

• why the mainstream market was closed to them, and why that was unlikely to change while the restriction remained;
• that Basel 3.1 capital rules, coming into force for banks and building societies from 1 January 2027, are expected to make restricted-use security more expensive for lenders to hold, not less;
• what commercial lending was available, what it would cost and what the lender would expect from them; and
• that selling in a planned way, with time in hand, would likely give a better result than selling under pressure later.