Why do some buy to let lenders accept certain tenant types and not others? Examining four common tenant criteria, Consultant Broker Luke Worrell explains why they’re not included on all lender criteria and whether it’ll make sourcing mortgage finance a challenge for you!
Assured Shorthold Tenancy (AST)
An Assured Shorthold Tenancy is the most common agreement between private buy to let landlords and their tenants. Typically, it’ll be for one tenant or one family for a minimum of six months or a year.
Landlords and lenders favour this type of agreement because it guarantees rental income for the contract period. As the most common tenancy type, the majority of lenders accept it under buy to let mortgage criteria. What may vary slightly between lenders is the number of tenants allowed on one AST; the usual maximum is four. Any more than this, and you may be looking at an HMO arrangement where each tenant is on their own AST agreement.
Company lets are an agreement between you and a third-party company, who then essentially sublet the property. Typically, the agreement will be for a set number of years, with a fixed monthly payment. Depending on the contract, the company may be responsible for the upkeep of the property during this time as well, which is a potential saving for you as a landlord.
Of course, entering into a contract like this restricts what you can do with the property; it might not be possible to sell or capital raise from it. Furthermore, properties with these arrangements are slightly trickier to finance, as the majority of buy to let lenders do not include company let arrangements in criteria. The main reason for this is that the more parties involved in paying you rent to cover the mortgage, the higher the risk of defaults. There is also a degree of risk to the lender’s reputation: often, company let arrangements will help house vulnerable people, which, in the event of repossession, could be damaging to the lender’s reputation.
There is still a good selection of lenders who will accept company let agreements, but you will need to provide relevant paperwork about the contract during any finance application.
Any tenants in full-time further education are classed as students and make up a considerable proportion of the private rental sector. While you might automatically think of an HMO for student lets, it’s also possible to have small households on a normal AST for student property.
The main perk of student letting is that students tend to sign tenancy contracts for the next academic year by Christmas. Although the property may be void for a month or two over the summer, you’ll know you’ve got tenants moving in from September more than six months ahead. Competition for the best properties is HOT, so if your property offers the right features and is in a prime location, students will snap it up time and time again.
Traditionally, students don’t have the best reputation, and a common landlord concern is how well this type of buy to let tenant will look after the property. However, there’s no evidence to suggest that students cause more damage than any other tenant type.
Not all buy to let lenders accept student tenants in criteria. The main reason for this is that tenant turnover is high, and you are likely to have at least one void month every year. However, with the number of students increasing year on year, demand is high, and there are plenty of lenders that offer mortgages for student properties.
For more information on becoming a student landlord, check out our blog on the topic, here.
Housing Benefit/DSS Tenants
DSS tenants refers to tenants receiving housing benefits. Until recently, some lenders didn’t accept them on criteria; however, a campaign led by homelessness charity Shelter and buy to let landlord Helena McAleer (and supported by Mortgages for Business) means that now 99% of buy to lenders do accept them.
Often, part or all of the rent is paid directly to the landlord from the local authority, which is reassuring for many landlords as it reduces the chances of arrears. As with student tenants, there’s often a miss-conception that those receiving housing benefits make difficult tenants. Not true; there is no evidence to suggest this, which is why this tenant type will not be a stumbling block when applying for buy to let mortgage finance.
This is certainly not an exhaustive list of buy to let lender tenant criteria but covers the most common. If you have any questions about lender appetite for another group, please do not hesitate to contact me, Luke Worrell, on 01732 471684 or email me at email@example.com, and I’ll be more than happy to help!