What defines a buy to let?

A buy to let mortgage 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 AST (see below).

A buy to let cannot be classed as a buy to let if you or one of your direct family occupies more than 40% of 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 set up.

Rental Coverage

The big difference between a residential mortgage and Buy to Let in terms of how affordability is assessed is what's 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 £750 a month then your rental coverage would be 133%.

Most lenders will use rental coverage either as a standalone measure or taking 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.

The rules that define what is and isn't an AST are complex but an AST cannot be arranged where the Landlord resides in the same property (i.e. using the same house rather than another flat in the same building), where the rent is over £25K per annum, or when renting to a company.

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 taking into account other mortgages you may have.

Although these products have mostly disappeared for now they may be back in the future.

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 portfolio value.

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 loosely refers to medium to large house shares and student let accommodation.

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.

It is standard for each bedroom to require its own sink for example.

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