Financing an HMO or Multi-Let Property

An HMO or multi-let property can offer landlords higher rental income and reduced dependence on a single tenant.

It can also be more complicated to finance.

Lenders may need to consider the number of occupants, tenancy arrangements, room sizes, shared facilities, licensing, planning, management experience and the property’s likely appeal to other investors.

A mortgage suitable for an ordinary single-let house may therefore be completely unsuitable for an HMO or multi-let property.

The finance conversation should begin before the landlord makes an offer or starts conversion work.

Is it an HMO or a multi-let?

The terms are sometimes used interchangeably, but the legal and mortgage classifications do not always match perfectly.

A property occupied by people from more than one household who share facilities may meet the legal definition of an HMO. However, lenders can divide this market into different categories according to:

• The number of letting rooms.
• The number of occupants.
• Whether tenants have individual agreements.
• Whether the property is purpose-built or converted.
• The type of tenants.
• The number of kitchens and bathrooms.
• Whether any units are self-contained.
• The licensing and planning position.

Some lenders may treat a smaller multi-let property within relatively standard criteria. A larger HMO, student property or building with an unusual layout could require a more specialist product.

Describing the property accurately at the outset is essential.

Licensing must be investigated early

The landlord should establish whether the property requires an HMO licence before committing to the purchase.

Licensing rules vary across the UK and councils may operate additional schemes covering properties that fall outside the main national requirements.

A lender may ask for:

• A current HMO licence.
• Evidence that a licence application has been submitted.
• Confirmation that the proposed occupation is permitted.
• Details of the licence holder.
• The maximum number of occupants or rooms.
• Evidence that any licence conditions are being met.

Requirements can differ between a purchase and a remortgage. Some lenders may consider a purchase where the new owner will obtain the licence after completion, while requiring an existing licensed HMO to have the correct documentation before refinancing.

Landlords should check the exact position with the local authority and obtain appropriate legal advice.

Planning is a separate issue

An HMO licence does not automatically confirm that the building has the correct planning use.

Planning restrictions may affect whether a standard house can be converted or occupied as an HMO. Local Article 4 directions can remove permitted-development rights that might otherwise apply.

The lender’s solicitor may need evidence of:

• Existing lawful use.
• Planning permission where required.
• Building-regulation approval.
• Consent for previous conversion work.
• Compliance with any planning conditions.

A property can appear to offer excellent rental potential but still be unsuitable for the intended mortgage if its lawful use cannot be demonstrated.

Landlord experience can affect the options

Some lenders will consider first-time landlords or borrowers purchasing a smaller HMO. Others require previous experience, particularly where the property has more rooms or involves specialist management.

The lender may consider:

• The applicant’s existing rental portfolio.
• Previous HMO or multi-let experience.
• Experience managing individual tenancies.
• Whether a professional managing agent will be appointed.
• The applicant’s income and financial resilience.
• Knowledge of the local rental market.
• Experience completing refurbishment work.
• The size and complexity of the proposed property.

A landlord without direct HMO experience may still have options, but lender selection becomes especially important.

How will the property be valued?

The valuation can have a major effect on the available mortgage.

A smaller HMO that could readily return to use as a family home might be valued primarily by comparison with similar residential properties.

A larger, purpose-built or established HMO may be considered on an investment basis, taking account of rental income, operating costs, yield and investor demand.

An investment valuation is not guaranteed simply because the room rents produce an attractive total.

The valuer may examine:

• Location and tenant demand.
• Room sizes and layout.
• Communal space.
• Kitchen and bathroom provision.
• Fire and safety measures.
• Planning and licensing.
• Current and achievable rents.
• The condition of the property.
• Local sales evidence.
• Marketability to future buyers.

If the valuation is lower than expected, the landlord may need a larger deposit or a smaller mortgage.

Will the rent support the borrowing?

HMO rent is often calculated by adding together the rents for the individual rooms.

The lender may then apply an Interest Coverage Ratio and a stressed interest rate to determine whether that rent supports the requested loan.

The calculation can vary according to the lender, product, number of rooms, ownership structure and confirmed market rent.

The landlord should also distinguish between gross rent and actual profit. HMO costs can include:

• Utilities and broadband.
• Council tax where payable by the landlord.
• Cleaning and gardening.
• Management fees.
• Licensing costs.
• Safety inspections.
• Furniture and appliances.
• Repairs and increased wear.
• Allowance for void rooms and arrears.

A high headline rent does not necessarily make the property affordable or commercially successful.

Conversion projects require an exit strategy

A property requiring substantial work may not initially qualify for a long-term HMO mortgage.

The landlord might need short-term refurbishment or bridging finance to purchase and convert the building before refinancing.

That strategy should be based on:

1. A detailed schedule of work.
2. A realistic budget.
3. A contingency allowance.
4. The required permissions and approvals.
5. The intended completion date.
6. The likely finished valuation.
7. The expected room rents.
8. A suitable long-term lender and mortgage.

The exit route must be investigated before the short-term finance is arranged. Completing the work does not guarantee that the finished property will meet the intended lender’s criteria.

Prepare the complete case

Before applying, a landlord may need floor plans, room measurements, expected rents, tenancy details, licensing information, planning evidence, a schedule of work and a complete portfolio statement.

Limited-company applications may also require company documents, director information and personal guarantees.

Preparing these details early can prevent delays and help ensure that the application is presented to an appropriate lender.

Speak to NetRent before committing

NetRent Mortgage Solutions works with DNA Financial Solutions to help landlords explore HMO, multi-let, limited-company, refurbishment and remortgage options.

We can examine the property, proposed occupation, landlord experience, valuation approach and rental calculation before a mortgage application is submitted.

If you are considering buying, converting or refinancing an HMO or multi-let property, call 01352 721300 or email mortgages@netrent.co.uk.

NetRent does not provide legal advice. This article represents our general understanding of the landlord mortgage and rental property market and is provided for information only.

Licensing, planning rules, mortgage products, rates, fees and lender criteria can change. Appropriate mortgage, legal, planning, valuation and tax advice should be obtained before proceeding.

Your property may be repossessed if you do not keep up repayments on your mortgage.