How can you finance HMO property development?
What types of finance are available for HMO developments?
These products are short-term secured finance products, which are designed to fund the property while the required refurbishment work takes place.
There are subtle differences between the two products, which we will break down throughout the article. In simple terms, a bridging loan is usually used where most of the work is internal, or converting an existing structure. Development finance is used when the conversion is large scale or when building a new property.
What type of HMO conversions can be financed?
Due to the nature of HMOs, each conversion is bespoke. We can fund almost any application including the following:
- Converting a house into an HMO
- Converting commercial property into an HMO
- Extending property and converting it
- Building a purpose-built scheme from the ground up
- Converting pubs or offices into larger HMOs
What happens once the conversion is completed?
Once the project is complete and the property ready to be let, the property can then be refinanced to a traditional HMO mortgage (assuming the property is being retained and let).
The rates charged on mortgages for HMOs are lower than those charged on the short-term finance products used to fund them during conversion. This will usually lead to big cost savings when taking out an HMO remortgage and will allow you to generate profit from the monthly rental income.
Types of HMO finance
What are the short-term options?
As mentioned above, the two options are development finance and bridging loans. A specific type of bridging loan is used in these situations, known as property refurbishment finance.
There are a number of similarities between the two broad product types and the lines can often blur between them.
The key points are that both will provide the funds to purchase the property, minus a deposit from yourself and in many cases, they will fund the conversion costs.
Whether using bridging finance or a property development loan, your interest is usually added to the loan, meaning you have no monthly payments to make.
How do HMO mortgages work?
Mortgages for HMOs work in much the same way as buy to let mortgages. They are arranged over a longer term, usually anything from 5-30 years and are usually interest only, meaning you only pay the interest each month.
They can be arranged on a fixed or variable rate basis and there is usually a wide selection of products to choose from.
Can I convert a property using an HMO mortgage?
HMO mortgages are designed to fund a property which is either currently being let as an HMO or is ready to be let. HMO lenders are usually unwilling to offer finance during the conversion phase.
This is often true even where the work required to meet the standards required and obtain an HMO licence will take a very short-time.
As such, it isn’t usually possible to fund a conversion using an HMO mortgage.
If you’re keen to avoid the risk of being unable to refinance your loan once the conversion is complete, you should consider bridge to let finance.
Key product features
|Max LTV||Up to 80%|
|Interest rate||From 0.45% per month|
|Charge types||1st charge only|
|Interest type||Added to the loan, deducted or serviced|
|Completion timescale||5 days – 3 weeks|
- Residential or commercial property acceptable
- Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
- Minimum applicant age 18 years – no maximum age
- Available in England, Scotland, Wales and Northern Ireland
- Adverse credit accepted (on a case by case basis)
How much can I borrow?
What is the maximum loan to value?
You’re usually able to borrow up to 75% of the property value with HMO development finance, and in some cases, the lender will also lend the conversion costs.
When the interest is added into the loan amount, this may increase the deposit needed.
Understanding the importance of your exit strategy
Your maximum loan will be restricted based on your chosen exit strategy.
When you’ll be repaying the loan by refinancing onto an HMO mortgage your development loan will be restricted to the amount available through the HMO mortgage.
What will it cost?
What interest rate will I pay?
The rate charged depends on a number of factors, but you can usually expect to pay between 0.45-0.85% per month. The thing that has the greatest impact on the rate charged is the loan to value of your application.
Once the works are completed, we are able to refinance your application to an HMO mortgage, or large HMO mortgage, which will come with lower rates and fees.
Are there other fees to consider?
Yes, on top of the interest charged, you will be expected to pay a number of fees, the main ones are as follows:
Lender arrangement fee – These fees usually range between 1% – 3% of the loan amount. Most lenders charge a 2% arrangement fee when the loan is set up, which can usually be added to the loan.
Valuation fee – These fees are paid to a chartered surveyor to allow them to undertake a survey of the property and produce a valuation report. The valuation fee is usually payable early on during the application process.
Legal fees – When taking out finance for an HMO conversion, you are usually expected to cover both your own, and the lenders legal expenses.
Can I arrange finance for a part-competed project?
Yes, we’re able to arrange finance for projects that are part-completed. This is a fairly specialist area of the market, but we work with a number of funders who are keen to lend in this scenario.
How long can I borrow over?
In theory, we can lend for up to three years for conversions, however they are usually very short-term, due to the nature of works involved.
Can you work with first time HMO developers?
Yes, we’re able to work with first-time developers to fund these schemes.