Financing HMO Properties – The Friends Effect

The Government briefing paper on HMOs (Houses of multiple occupancy) showed that there were 497,000 licensed HMO properties in England and Wales. The HMO is the fastest growing sector of the private rental market.

Traditionally the HMO was considered the lower-cost rental option. The assumption being that lower cost equals lower quality, which may have been true, however, this is changing with more quality HMO properties.

One of the reasons for this shift is known as ‘The Friends Effect’.

Successful young professionals sharing a property in a prime location. Well equiped property, quality accommodation with a quality tenant.

This lifestyle choice is driving demand for good quality HMO properties in good locations.

Why this matters when financing an HMO

Why this matters is down to the assumption that lenders have about HMO properties. This goes back to the original point that the HMO always used to be a property where the tenant quality was lower. Many lenders have restrictions on who a property can be let to with HMO lending attracting a higher interest cost.

Unless the tenant quality is made clear to the lender a landlord with a quality HMO could end up paying over the odds for their borrowing.

This video gives a few more details;

What makes an HMO an HMO

Not quite as simple as it sounds, especially when it comes to how lenders and mortgage providers categorise an HMO property.

If you look at the lender criteria then what one may view as an HMO another may not. Don’t assume just because it is or isn’t that a lender will assume the same.

When it comes to the legislative definition, the standard definition of an HMO is;

The building or part of the building must consist of one or more units of living accommodation that
is not a self-contained flat or flats. The living accommodation must be occupied by more than one household who share one or more of the basic amenities (toilet, washing facilities and cooking facilities), or the accommodation is lacking in one or more of these amenities. The occupiers must occupy the living accommodation as their only or main residence and their occupation must constitute the only use of that accommodation. At least one of the occupiers must pay rent or provide some other consideration in respect of the occupation.

If you have a property that fits this definition then consider the following when seeking to mortgage or borrow against the property;

• Be clear on your tenant profile, communicate it clearly
• Check the lender definition of an HMO, your property may or may not be considered an HMO by that lender
• Check the cost of finance. There is a greater variation in pricing of HMO mortgages than standard buy to let mortgages

For any questions about HMO borrowing, or to just talk about Friends in general then get in touch.

By Dave Farmer