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What defines a Buy to Let?

Updated: May 31, 2023

‘Content correct at time of publishing and subject to change’

A guide to the main points and terminology around Buy to Let Mortgages, and what this means for you if you have a poor credit history.

A buy to let mortgage with bad credit is for the purchase of property that will be let by you to tenants who are not in your direct family and who are leasing the property in general on an Assured shorthold tenancy AST (see below).

A buy to let cannot be classed as a buy to let if you or one of your direct family occupies the building or property. Legally these would be classed as a residential mortgage and so this can make things difficult when it comes to finding a lender for such a setup.

Having a poor credit history complicates the situation a little as you will need to find someone who will offer a buy to let mortgage with bad credit.

Rental Coverage

The main difference between a residential mortgage & Buy to Let mortgage is how affordability is assessed. This is called rental coverage.

This is the percentage of the monthly mortgage cost that the expected rental of the property will cover.

So for example, if your property has a monthly rental expected of £1000 and the mortgage was £700 a month then your rental coverage would be 142.85%.

Most lenders will use either rental coverage as a standalone measure or take into account your personal income as well when assessing affordability.

Assured shorthold tenancy

Most lenders will require a buy to let landlord to use an assured shorthold tenancy rather than a long-term contractual lease because it gives an absolute right for the owner to take vacant possession.

Rental & earned

This refers to a mortgage product which would allow you to make up a shortfall in the rental coverage of a buy to let using your own income.

The lender would assess affordability based on an assessment of both types of income as well as considering other mortgages you may have.

Portfolio Gearing

Gearing is a term used to describe the overall equity levels within a portfolio of properties and gives an indication of the level of debt against the value of portfolio.

If a portfolio has a high gearing there is very little equity in the overall portfolio.

Student Let properties

Some lenders used to accept rental assessment based on several occupants rather than a single assured shorthold tenancy.

Due to the reforms that defined HMO's (see below) this usually now comes under that legislation and so will often require a commercial mortgage.

Houses of multiple occupation or HMO's

HMO stand's for Homes of Multiple Occupancy and this is a term coined by the government to describe properties where several individuals reside that do not make one single household.

It therefore mainly refers to medium to large house shares or student let accommodation and it is common from a lenders perspective to treat any property that is let where there are individual locks on bedroom doors as a HMO.

The rules governing what is classed as a HMO are complex and there is variation between different local authorities in terms of the requirements on HMO landlords.

HMO properties normally require specialist HMO mortgages offered by a small number of buy to let lenders or commercial mortgage lenders.

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