13 June 2016

HMO Mortgages

HMO MortgagesHMO Mortgages

A House of Multiple Occupancy (HMO) is defined as a single property where 3 or more people who are not from the same family all reside. The HMO market in the UK is expanding, driven by a change in demand for property, the cost of living and a demographic change driven by inward migration and a more transient work force.

Consider that of those people living in an HMO;

  • Only 31% could afford to live in a property on their own
  • Only 12% could realistically buy their own home
  • In London up to 50% of tenant income goes on rent alone

This starts to build the picture of why the HMO market is expanding. If you then add in that the average income for an HMO is £26k then you can start to see the appeal to landlords and property investors.

The question often asked is why are HMOs viewed differently by lenders than standard buy-to-let properties? Financing the purchase of an HMO through normal residential investment brokers can often lead to disappointment, here is why. Rest assured though, you can mortgage and finance an HMO purchase.

Valuation Challenges With HMOs

Historically investment property lenders have looked at rental income being sufficiently higher than the mortgage cost to justify the loan. HMOs differ. The investor has manufactured value because they are receiving a much higher yield than a standard buy-to-let, this is done by renting out rooms separately and achieving a higher overall rental income. If property is valued on a multiple of rental income then the value should increase to reflect the cash the property now produces.

But this is an area that professional chartered surveyors are disagreeing with. Chartered surveyors use the RICS Red Book to guide them in valuation. However, the authors of the Red Book have realised that there is no guidance given on HMOs. This means there is no set guidance on how to value an HMO, meaning that the property often gets undervalued, in turn causing the mortgage offer to be rescinded.

This is where using a standard mortgage lender starts to let you down.

Tenant Quality Issues

The falling provision of social housing during the austerity programme as well as schemes such as right to buy has pushed social housing tenants in the direction of HMO landlords. This makes perfect sense as social housing tenants are a sector that would be attracted to HMOs due to their reduced cost.

Some mortgage lenders require tenants to be privately funded, essentially looking for a quality tenant to protect their asset. The lender is also looking at less state reliance as budgets for housing benefits are reduced, they want to avoid any void periods or non-payment of rent.

The paradox is that a void in an HMO is only part of the overall rent, not all of it, so the structure is more secure and offers greater positives to the lender.

However, lenders are typically slow to react and these positives are yet to feed through, meaning the HMO mortgages can be declined even where the business case stacks up.

HMO Mortgage Options

HMO mortgages need to be looked at differently. We have that expertise and regularly get this type of property mortgaged and financed. We do this by using the correct lenders who understand how HMOs are valued and how the income works.

As a guide you can obtain;

  • Up to 80% finance on new HMO purchases
  • Use an existing HMO to raise capital as a deposit on your next purchase
  • Buy an existing property, convert to an HMO and not need to change your mortgage or be in breach of any condition
  • Rates from 3%
  • Same day approval
  • Borrower poor credit history can be overcome

The HMO market is expanding, however if you look at the same options for standard buy-to let then you will experience difficulties. If you have seen or are considering an HMO purchase then please get in touch as we can provide the options to you before you bid or make an offer.

Add your details below and someone will make contact within 24 hours, if you need anything sooner please call on 01293 541333.

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Statistics taken from Shawbrook HMO report April 2004