Securing £2 Million Property Finance for HMO Landlords
Inexperienced HMO landlords can find accessing finance complex - Rangewell are here to help
Finding the right finance to help our client purchase their first HMO
Recent tax changes have affected property business models and profitability and have had a significant on many Buy to Let investors - many of whom are turning their focus to HMO's (Houses in Multiple Occupation) where the returns can be significantly higher.
A buy to let mortgage works in a similar way to a residential mortgage, 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 specifically, an ordinary buy to let mortgage cannot be used to provide funding for an HMO purchase.
Because of the complexities of the HMO Market, most ordinary buy-to-let mortgage will have a clause excluding HMOs. A specific HMO mortgage arrangement will be required, which not all lenders can provide - and those that do often requre the landlord to be experienced in managing HMOs - leading to a catch-22 situation, how do you become an experienced HMO landlord if you struggle to finance your first HMO?
What is an HMO?
An HMO, or house in multiple occupation is a single house or other dwelling that is let by the room to a number of tenants. An HMO or House in Multiple Occupation is a property where unrelated tenants have exclusive access to their rooms and share common living areas, such as a kitchen or bathroom. The property can either be let on one Assured Shorthold Tenancy which includes all the tenants, or each tenant can have their own AST agreement. Legislation requires that some HMOs are licensed by the local authority.
The problem is that HMOs have a reputation as being more heavily regulated, requiring more maintenance and often 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 ini value, and be impossible to resell.
Things can be even more difficult if the property must first be converted to provide an income. Converting a property can mean high profits it is done in the right way and supported by a knowledge of the market - but it will mean delays that many lenders will not be prepared to accomodate
Special mortgage arrangements may be required.
We were recently contacted by a client who wanted to buy an investment property close to their home in Derby.
The property was a large Victorian house, in poor condition. It was currently a three-bedroom property, but the rooms were large, and by using the downstairs rooms as letting rooms and converting the loft our client believed that it could be operated as a six-bed HMO. He had some experience as a landlord, with tenants in the flats above a shop he owned, but he realised that there would be some challenges. When he approached their usual mortgage lender they could not help. There were a number of reasons why.
We looked at his plans, and saw the challenges – and the ways to overcome them.
The first issue was the fact that the property would be an HMO. An HMO or House in Multiple Occupation is a property where unrelated tenants have exclusive access to their rooms and share common living areas, such as a kitchen or bathroom.
An ordinary buy-to-let mortgage will have a clause excluding HMOs – which lenders see as creating a much higher risk than a single-tenant property. A special mortgage arrangement which specifically caters for this type of property will be required, a facility that only a minority of mortgage lenders can provide. Many of those that do will only consider doing so for borrowers who have experienced in the sector.
The fact that the property would need extensive work before it could bring in income was also a factor that would deter many lenders.
There was also a problem caused by the Covid crisis. A lender he had contacted previously had offered funding at 65% LTV. This would be possible for our client, although it would leave him with little reserve for the work required on the property. But as the depth of the covid crisis unfolded, the lender reviewed its offer, and was only prepared to offer 50% LTV - which would have left our client unable to find the necessary deposit.
It looked as though the deal would be lost.
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 of £178,000 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, know 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
We sourced a 70% Loan at 4.39% fixed for two years with a 3.00 % fee, on a 20-year interest only deal.
The mortgage payments would be less than half the income achieved once the house was in full occupation, even after costs had been factored in.
“We knew that we could make a success of the project if we could find the funds we needed. Rangewell made it possible”
Without in-depth knowledge of the lending industry it can be extremely difficult to find the lenders who can provide the most competitive rates for specialised funding such as Development Finance. At Rangewell we not only have the necessary knowledge, we can put it - and our network of contacts throughout the property lending market - to work for you.
We recently helped a Manchester property owner with a challenging redevelopment project
“The funding was exactly what I needed, and we were able to start work immediately - despite the lockdown. The boost to the value of the property thanks to an unexpectedly buoyant market is making things look brighter than ever.”
Why we were able to help
At Rangewell, 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%.
£2,000,000 at 0.89% over 18 months - with no penalty for early repayment
if you are ready to find better answers to your property funding needs contact the Rangewell property hotline on 020 3318 2613
Getting the right deal for your property development plans
Finding the right lender for your development project can be crucial to its success and profitability. That’s why it is important to speak to the Rangewell team without delay. 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 term includes experts in property finance, and our service is personal. It lets you 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.
It often means finding solutions that our clients did not know were possible - it always means having a property expert working to save you money
We will discuss your plans, we can 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 hat 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.
To find out more call the Rangewell property funding team for an informal discussion on 020 3318 2613 or email firstname.lastname@example.org
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
Talk to Rangewell – the business finance experts