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Case Study

Property finance for an HMO

Even with multiple shareholders

Providing finance, despite the property needing extensive work and the additional complication of multiple shareholders. 

Getting the right kind of mortgage is always important. Residential or homebuyers mortgages provide a simple way to spread the cost of buying a home over the long term.

A buy to let mortgage works in a similar way but allows the property to be let out - effectively providing a business income. But there are exclusions to how a buy to let mortgage can be used - and an ordinary buy to let mortgage cannot be used to provide funding for an HMO.

What exactly is an HMO?

An HMO is simply a house in multiple occupation. It is usually a single house or other dwelling that is let by the room to a number of unrelated tenants. However, HMOs have a reputation as downmarket, with unreliable tenants, and many lenders will not fund them as they believe they represent a high risk - and that the property itself, which represents the ultimate security for the loan, will suffer in value and be impossible to resell.

An ordinary buy to let mortgage will have a clause excluding HMOs. A special mortgage arrangement will be required, which not all lenders can provide.

We were recently contacted by a client who wanted to buy an investment property for use as an HMO.

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The first challenge

The property was a large Victorian house that currently had five bedrooms, but by using the downstairs rooms as letting rooms, our client believed that it could be operated as a seven-bed HMO. 

The client already had some experience as a landlord and was able to put down £75,000 - but needed £150,000 from a lender to complete the purchase. 

He was able to arrange this with a bridging loan - but when he went back to his broker to arrange a long-term commercial mortgage to replace the high-cost, short-term bridging loan he immediately hit problems.

The first issue was the fact that the property would need extensive work before it could bring in an income. This alone would be enough to deter may lenders.

However things became very much more difficult when a lender he had contacted previously, who had offered funding at 65% LTV, reviewed their offer and reduced it to 50% LTV - before pulling out of the deal altogether!

It looked as though the developer would be left with a high-cost bridging loan, which would mean penalty payments if it could not be replaced by a lower cost product for the long term.

He came to Rangewell for help.

How we helped find a solution

Our property funding specialists looked at the potential of the property and the deal our client wanted to set up.

The purchase price was reasonable for the property, and we believed that by using our knowledge of the commercial mortgage lending market we could secure funding that was based on the current market value of the property - but which would recognise its potential as an HMO.

This sum, is known as the Gross Development Value or GDV. Gross Development Value may be used as part of a residual valuation, that is, the process of valuing a property with development potential. The sum of money available for the purchase of land can be calculated from the value of the completed development (GDV) minus the costs of the development process (including profit).

We believed that the GDV of the property would be much higher, and found a local valuer who suggested a value of £320,000.

Armed with this figure, we were able to approach a lender we believed would be amenable - but there was another problem.

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The second challenge

Our client was the principal of a property business and, when we looked at the company structure, we saw that it had five directors and another five shareholders. This would mean some very severe problems for securing a loan - lenders would simply refuse to work on such a complex deal. It would mean too much time spent in administration, and the presence of multiple shareholders would multiply the risk.

Without in-depth knowledge of the property lending sectors it can be extremely difficult to find the lenders who can provide the most competitive rates for specialised funding - and specialised funding is required whenever a property deal deviates form the standard practices. 

Why we were able to help

At Rangewell, we not only have the necessary knowledge, but we can put it - and our network of contacts throughout the property lending market - to work for you. We work with all the lenders in the UK market and not only do we know which are most suitable for a particular type of deal or a particular sector, we know those that can offer the most cost-effective solution for an individual need.

We were able to secure the funding required by our client at just 6%. This was higher than a standard rate - but it reflects the additional risk caused by the unusual business structure.

We sourced a 70% Loan at 6% fixed for two years with a 3.00 % fee, on a 20-year interest only deal.

Our team is made up of industry specialists. Whatever your line of work, we have someone who understands the challenges you face - and the ways to answer them.

Our team includes experts in Property Finance and our service is personal. It means you can talk to a property funding expert who understands the challenges you face with your project to find a solution that is planned around your business needs and working to save you money.

We will discuss your plans, then call on our network of property lenders - which includes virtually every name in the UK market - to get the funds you need.

If you have a property project that needs funding, just call us and one of our experts will be able to discuss the options, and work out the most cost-effective ways to provide the funding you want - whatever the challenge your business plans present - and in most cases, our services are absolutely free.

Need support with your next (or first) property venture?

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Property development costs less with help from Rangewell

  • Individual arrangements tailored to your circumstances
  • Adverse Credit – no problem
  • Repayments geared to your revenue stream - including interest roll-up
  • Understanding the funding challenges for your sector
  • Personal service

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