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Mortgage Property Investments

Popularity of HMO’s Set to Rise thanks to Lending Regulations

If you’ve been toying with the idea of investing in a House of Multiple Occupation (HMO) for a while now then it’s time to get moving before the stampede begins. What stampede we hear you ask?

Well, there may not be dust clouds gathering on the horizon quite yet but you can be sure they’ll start to appear within the coming months – if not by the end of the year. Why’s that?

Mortgage Property Investments
Mortgage Property Investments

The fact is HMO’s have always had the potential to bring in higher cash yields that their standard buy to let equivalents. At the same time many property investors have been put off by the extra work that’s involved in letting a property to five or more tenants. Then there are all those rather high hoops to jump through when it comes to local authority approval. However, thanks to the Prudential Regulation Authority (PRA) paper on underwriting standards for the buy to let market, the prospect of high HMO yields are about to become an awful lot more attractive to both landlords and lenders.

The reason for this is the fact that lenders will be looking for higher rental figures in order to improve the loan to value ratio in their eyes. Having said that, there will still be the five year plus fixed rate deals around as well as decent remortgaging options).

Still, if you’re a landlord and are considering a swap into the HMO market, what specific rules and regulations do you need to look out for? Well, here’s a quick run-down of the most important:

Limited HMO finance lenders 

Firstly, HMO finance is a bit of a specialised market. There are ten or less dedicated HMO mortgage providers currently in the market from Kent Reliance offering up to 85 per cent loan to value (LTV) to Shawbrook and BM Solutions at 75 per cent LTV There are also some high street lenders offering between 60 to 70 per cent LTV.

The reason finance companies have traditionally been reluctant to lend for a multi-roomed property is the prospective difficulty in selling the property if it ends up being repossessed and going to auction.

Another unique aspect to HMO lending is that companies rarely provide finance for this type of venture to a new landlord. They prefer to see that he or she has at least cut their teeth in the buy to let sector beforehand.

HMO health/safety guidelines

As a landlord of a typical buy to let you are required to ensure the property is fire safe and passes the requisite gas and electricity tests. Being an HMO landlord though is a whole other ball game. Not only do you have to obtain a special HMO licence from your local authority in order to take in tenants in the first place, but you are also expected to carry out regular fire checks (either by yourself or by appointing a tenant to supervise it). The fire checks must then be logged in a book and kept on the premises for inspection.

HMO Safety Guidelines - Property Investment
HMO Safety Guidelines – Property Investment

Other HMO safety stipulations

  • A fire extinguisher must be provided for every separate floor of the property and there must be a fire blanket in the kitchen.
  • Legally a gas inspection should be carried out annually via a CORGIE approved installer. The electricity must be checked every five years but law, but it’s a good idea to carry this test out annually too. The latter results in an Electrical Installation Condition Report which should also be available for inspection by tenants and the local authority.
  • PAT. A Portable Appliances Test (PAT) isn’t obligatory but it makes sense to carry one out every couple of years since it’s the landlord’s duty to ensure kettles, toasters, microwaves etc are all working and safe to use. You’ll know they’re safe to use if they have a CE mark (which is the Electrical Safety Council’s ‘checked’ logo). The Council recommends larger items such as washing machines and dishwashers are checked every four years.

Failure to carry out any of the above mentioned statutory tests could result in a maximum £5000 fine and have your HMO license being revoked. So, they’re all worth remembering about – even the obligatory ones.

Property stipulations

These vary depending on the local authority but basically there should be one bathroom/WC for every four tenants. These and other communal areas should always be kept clean and tidy (so you’re really looking at hiring a cleaner). The pipes should be lagged and the water running clear.

In terms of preventing rubbish build-up there should also be plenty of bins on the premises. Tenants should also be guaranteed privacy with a lock on their bedroom door as standard.

You can find more information on HMOs and what’s required specific to your area on the local authority website covering the property’s location. More general information on HMO Health and Safety rules can be found on the government website.

The repurpose of larger properties into one of multiple dwellings is an attractive proposition. At the higher end of the market, there is a good number of properties and not so much demand. HMO property investment are very popular at the moment and we see no reason not to go with this trend all the while there is a chronic shortage of affordable housing.


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