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What is an HMO and what finance solutions are available?

Published on 10th April 2019 - Last update on 13th April 2020

Residential property in the UK is a lucrative asset to possess. Each year, the housing market continues to grow in value, with no slow down insight. But once you’ve purchased a property, what next? Until you sell up, which could be many years down the line, the capital that you’ve invested lies beyond your reach. One way of solving this issue is by turning the property into an HMO, earning you a reliable monthly income. However, setting up an HMO isn’t cheap, nor is it easy. So what exactly is an HMO and what finance solutions are available?

What is an HMO?

An HMO is a property under multiple occupancies, made up of no less than 3 tenants living as 2 or more separate households, sharing a communal kitchen, bathroom or toilet facilities. The property must also be their main place of residence, with the primary purpose of the property being intended as such. Examples of an HMOs may include:

  • An entire house or flat
  • Bedsits or other non-self-contained accommodation
  • A converted house - containing one or more flats that aren’t self-contained (a household that doesn’t contain its own kitchen, bathroom or toilet facilities)
  • A converted building or complex accommodating self-contained flats, let on short-term leases, which doesn’t meet the 1991 building regulations

Looking to purchase or redevelop an HMO property? Need help raising the necessary capital? Apply for HMO Finance and learn more about how you could benefit.

Will I need to apply for a licence?

This can vary between council authorities and the guidelines that they enforce.

So, although not all HMOs require a license, you may need to apply for one if your property is:

  • At least 3 stories high
  • Houses at least 5 tenants, which make up more than one household
  • Houses tenants who share a communal kitchen, bathroom or toilet

However, if you have any questions regarding whether you need to apply for a licence, you must contact the local authority with whom the property falls under.

This is because some councils may enforce tighter regulations on HMOs than others, especially if they feel that there are too many emerging in one area, regardless of the property’s size. In addition, they also take into account whether or not you’re the right person to be running an HMO, for example, do you have a criminal record regarding theft or assault?

If a local authority discovers that you are running an HMO without a license where one is necessary, you’ll be charged a fine for non-compliance, which could be as much as £20,000.

What finance solutions can I apply for?

If you’re looking to purchase an HMO property or to redevelop properties in your portfolio, you’re no doubt aware that completing your goals can be expensive. The capital outlay required can easily push you into financial difficulty, especially if you’re using your own savings. But, there is another path that you could take. For many UK landlords, the solution to these issues could be to apply for either a Commercial Mortgage or Bridging Loan.

Commercial Mortgage

Commercial Mortgages are long-term agreements that can last up to 20 years. A secured form of funding, the agreement is secured using the property you seek to purchase or redevelop, depending on the purpose. Plus, subject to negotiation, you’ll also need to place a portion of your own capital into the agreement. Although this usually starts at 20% of the property’s purchase price or current worth, providing as much as 40% could earn you a more favourable agreement. This will also reduce the amount that you’ll need to borrow, saving you money in the long-run. During the course of the agreement, you’ll need to make fixed monthly repayments, plus interest. However, the interest on these payments can vary depending on whether you’ve chosen to apply for a Variable or Fixed Rate Mortgage.

Bridging Loan

Meanwhile, Bridging Loans are short-term agreements that can last up to 12 months and secured against property. As such, you could borrow up to 80% of the seller’s asking price or the property’s current worth. Plus, you could establish an agreement in as little as 48 hours, with the funds following soon after. Nevertheless, you need to aware that Bridging Loans are available in two forms: Open Bridge and Closed Bridge.

  • Open Bridge: With an Open Bridge you aren’t required to fully repay the loan by a specific date. However, you are expected to completely repay the product within the prescribed term or period.
  • Closed Bridge: If you choose a Closed Bridge, you will be expected to fully repay the loan by a set date.

However, although this determines when you the loan needs to be settled, you now have to decide how you’re going to take care of the interest. Unlike other finance products, where you simultaneously repay both the Principal (money that you’ve borrowed) and the interest, a Bridging Loan requires you to treat these as two separate aspects of the agreement. So in the run-up to the point where the Bridging Loan needs to be fully repaid, you need to decide whether to use:

  • Monthly Interest Payments: By using this option, you will be required to make interest payments at the end of each month until the Principal on the loan has been fully repaid.

  • Rolled Up Interest: Here, the total amount of accumulated interest is combined with the total amount of money that you have borrowed. When you are due to settle the loan, depending on which product you’ve chosen, both interest and the principal is repaid in a single, final payment. Note that this will increase the size of the final payment, so you need to be certain that you can afford this option.

  • Retained Interest: With this option you are, in fact, borrowing the interest that would be accumulated for an agreed number of months on top of the money that you are already requesting. The amount of interest that you’re borrowing is then retained by the lender but is designed to offer you a safety net as you make monthly interest payments until the loan’s principal has been fully repaid. If you haven’t used up all of the interest that was retained, or you’ve managed to fully repay the loan early, lenders may reimburse a portion of the retained interest that wasn’t used.

Thinking about financing an HMO?

Whether you’re looking to purchase, extend or renovate, managing an HMO isn’t easy. It’s a major responsibility that requires to constantly stay on top of council regulations in order to ensure the safety and satisfaction of your tenants. But, as always, the obstacle standing in your way could be the cost outlay. But by exploring what the UK lending landscape, you could gain access to external funding opportunities that allow you to raise the capital you need to achieve your property goals in complete confidence. All you have to do now is source appropriate agreement from a lender you can trust. But how?

At Rangewell, we’re an Access to Finance specialist and have mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. We’re with you every step of the way. So if you’re looking to fund an HMO, apply for HMO Finance today or find out more with Rangewell.

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David Harrison

David Harrison

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