The Impact of Licensing on HMO Mortgages

HMO licensing was introduced in October 2018, and although the rules vary between local authorities, it’s undoubtedly a consideration for landlords considering an HMO mortgage.

Mandatory licensing impacts properties with:

• Five or more tenants
• Comprising two or more households

Previously, these regulations applied depending on the number of storeys, so many more property investors are now affected.

Today the Revolution Brokers team explains how HMO licenses impact your mortgage situation and the financial implications to bear in mind.

For more support with HMO mortgages or licensing requirements, please give us a call on 0330 304 3040 or email the team at info@revolutionbrokers.co.uk.

HMO License Rules Recap

While you’re likely aware of how the new rules work, let’s run through a quick summary to start with to give you an idea of how significant the changes to the rental market are.

• Around 177,000 additional properties fell under the new licensing terms.
• Bedrooms in HMOs must comply with minimum size requirements (which may be extended depending on the local authority).
• Licenses must specify the maximum occupants of any room and the property total.
• Breaches of licensing rules can attract an unlimited fine and civil penalties of up to £30,000.

So, what does this all mean for HMO mortgages?

In essence, anybody in this property market segment will see an impact, including landlords, lenders, surveyors, and brokers.

Mortgage Valuations for HMO Properties

The first aspect to consider is that if you are considering investing in an HMO that doesn’t meet the minimum room size requirements, it will be tough to mortgage on a like-for-like basis.

Ideally, you should alter rooms to be compliant, but this isn’t always viable.

An HMO previously valued as a commercial investment and which now has compliance challenges will not be valued as highly as before, making remortgaging a little trickier.

In this circumstance, you can still mortgage a property but need to understand that if you have a rental portfolio, a lender will want to consider your assets as a whole before they can offer a new HMO mortgage product.

For example, if you have a non-compliant property, then the rental income isn’t likely to be included in your affordability assessment if a provider agrees to lend at all.

However, there can be an opportunity to purchase HMOs at substantially lower than their previous market value and use a development finance product or bridging loan to cover the cost of renovations and structural work to meet the mandatory standards.

Changes to the HMO Lending Market

Another impact is that many of our HMO landlord clients find that lenders they have used previously have ducked out of the market altogether.

That’s usually because of the complexities of mandatory reporting and establishing whether a property has the appropriate licenses, meaning HMO mortgages now carry a higher administrative burden and compliance risk.

The good news is that specialist lenders are still available and offer competitive terms with comprehensive knowledge of the licensing system.

HMO Mortgage Valuation Delays

The licensing rules have been around a while now, but with 18-month rectification periods and all of the pandemic upheaval, it’s fair to say that things haven’t quite settled into a steady flow.

HMO mortgage lenders generally issue guidelines for surveyors’ valuations. Still, these have become outdated where, for example, valuations are based on single dwellings as a brick and mortar property rather than on the rental capacity.

Most experienced mortgage advisors now have new guidelines, but valuations can be delayed due to additional checks.

It’s also common for HMO valuations to take longer and cost more than before.

There are a few ways to expedite the process if you are looking to take out an HMO mortgage and don’t want to absorb any time delays:

• Contact the Revolution team as an independent, highly experienced HMO broker. We can recommend specialist lenders with specific HMO valuation guidelines.
• Commission expert surveyors to value an HMO on a commercial investment basis – these valuations rely on broader area surveys to compare rents and property prices.
• Carry out due diligence, such as measuring bedroom sizes, before you start the mortgage application process.
• Research the licensing rules in the area, including compulsory additions to the declarations required.

Expert Support with HMO Mortgages

The best way to ensure you are in an excellent position to apply for a competitive HMO mortgage is to work with a whole-of-market broker.

Our teams are well versed in the complications of HMO licenses and the information each niche lender requires to consider a new borrowing application.

It may be slightly more challenging to secure an HMO mortgage. Still, with a thorough knowledge of the rules and how they apply to any prospective investment property you’re interested in, it’s far from impossible!

Give Revolution a call on 0330 304 3040 for any support or assistance finding your ideal HMO lending product.