Categories
How To Get A Bridging Loan For An HMO
HMO bridging finance - As HMO grow in popularity, we explain how bridging loans can be used to convert a property to an HMO.
Landlords are increasingly focusing on Houses of Multiple Occupation (HMO) to increase their ROI.
One of the advantages of having an HMO over a regular buy to let is that you can charge rent by the room instead of the whole property. This can help boost your rental yield, allowing you to get more out of the property.
For example, a property with three bedrooms and three reception rooms could be rented out to a family, but that same property could be rented out to five tenants and provide a larger rental income.
If you're looking to buy a property and increase its potential, you could convert it into an HMO. But in most cases, it's not an option to pay cash, so it's likely you'll need finance.
In this guide:
When is a Property Classed as an HMO?
Is it Hard to Get a Mortgage for an HMO?
Are Landlords Using Bridging Loans for HMOs?
Bridging Loan Application Process
When is a Property Classed as an HMO?
A property is classed as an HMO when there are three or more tenants who are not part of the same household, which share communal areas such as a bathroom and a kitchen. An example of an HMO is a property shared by young professionals or a student house.
Types of HMO
HMOs fall into two different categories: licensed and non-licensed HMOs. A property with fewer than five tenants sharing a kitchen and/or bathroom won't need a licence.
Licensed HMOs
If you have more than five tenants living in your property then your property will be deemed a ‘large HMO' and you will need a licence. You can obtain a licence from the property’s local council and you'll need to pay an application fee to do so.
Whether you intend to have a licensed or non-licensed HMO, you will need additional finance to cover the purchase costs and to fund any necessary developments.
Traditional lenders
The housing market is extremely competitive and the process of applying for a mortgage is stringent. Having the right finance available might be the difference between a successful HMO project and a missed opportunity. A traditional mortgage can take time to arrange, so while it can typically work out as the most affordable option if you're working to a deadline (e.g. if you find a suitable property at auction) then applying for a mortgage may not be the most suitable route.
This is where bridging finance can be convenient because it allows you to act like a cash buyer and take advantage of time-sensitive opportunities. Bridging loans are flexible, and can be repaid by the sale of an asset (such as a business or another property) or it is possible to refinance to a mortgage.
If you're not sure what method of financing is suitable for your HMO, it's recommended to seek advice from an experienced broker. At Clifton Private Finance, we have a team of experts who can give you a full overview of your options and guide you through the process of securing a property loan.
Is it Hard to Get a Mortgage for an HMO?
If you have multiple buy to let properties, securing a mortgage for your HMO could pose unique challenges. This is because landlords can no longer spread equity across their portfolios. Traditional lenders will not grant buy to let mortgages to landlords with one or more properties that are not profitable.
During the application process, traditional lenders will now review a landlord’s entire property portfolio to ensure all their properties are profitable.
Securing Funding Time
It is not uncommon for applications to traditional lenders to take up to several weeks or even months to process. If you need finance quickly to complete a purchase then applying to a traditional lender may not be the best route to access the funding you need.
With the recent changes to the buy to let mortgage regulations and the length of time you may have to wait to secure the mortgage you need, you might want to consider alternative options for finance.
March 2024 Buy to Let Market Update
- Before 2023, the stress rate was around 4%, and landlords could borrow significantly more. For instance, about a year ago, a basic rate taxpayer could borrow around £309k for a property based on the average UK rent of circa £1,300.
- At 75% Loan to Value, that could buy roughly a £400k property, which you would expect to comfortably provide £1,300 in rental income. So it made sense, and the maths added up.
- The BTL market faced challenges in 2023, with landlords finding it difficult to borrow due to stringent stress testing measures. However, stress testing has eased up in recent months, and there is growing confidence in the buy-to-let market in 2024.
Did You Know?
Generally, 5-year fixes are typically the cheapest deals available for buy-to-let mortgages. The Prudential Regulation Authority allows mortgage providers to apply a lower stress test if the mortgage term is over five years.
Because of this, you may find a rare 2-year fix or tracker mortgage that seems more suitable, but in most cases, a five-year fix will work out as a more affordable option, purely because of the more lenient stress testing criteria applicable.
What Do the Experts Say?
Alex Morris, Private Client Adviser
What is Stress Testing in BTL Mortgages?
Stress testing is a method used by lenders to assess a landlord’s ability to cover mortgage payments under adverse conditions, ensuring that rental income is sufficient even in less favourable scenarios.
The specific rates mentioned (from 4% to 10.5%) refer to the hypothetical adverse conditions under which the stress tests are conducted. Higher stress rates make it harder to pass the test, thus reducing borrowing capacity.
Fergus Allen
Head of Bridging
Let us do all the hard work of finding the right bridging lender for your circumstances.
We secure bridging finance for applications of all types, and we negotiate competitive lending to meet your needs and timescale.
Property Bridging Loan Case Studies
Read through our 100+ bridging loan case studies, breaking down the details of how bridging loan transactions work in practice:
Are Landlords Using Bridging Loans for HMOs?
Landlords are using bridging finance to convert properties to use them as HMO purposes.
So, what is a bridging loan?
A bridging loan is a type of finance that is solely designed for short-term usage and can ‘bridge’ the gap until long-term finance is in place. They can provide a large amount of funding in a short amount of time. The strength of a bridging loan is its speed - a bridging loan can be secured within 7 working days, depending on your circumstances.
If you need finance to fund the purchase or development of your HMO property, then bridging finance may be able to provide the funds you need quickly.
Roll-up interest
Bridging loans often come with the option to ‘roll up’ the interest to pay at the end of the term of finance. This can allow you to use your loan for the purchase and development of your HMO property, without having to service monthly interest repayments.
Exit strategy
In order to secure a bridging loan you will need a clear exit strategy. An exit strategy is the method you intend to use to repay the loan at the end of the term of finance. An example of an exit plan could be where you have purchased your property or completed your HMO conversion and you secure long-term finance such as a mortgage to repay the bridge.
No early repayment charges
Unlike other types of finance, such as a mortgage from a traditional lender, bridging loans generally do not come with early repayment penalties. This may be an attractive feature of a bridging loan, as you may get long-term finance earlier than expected and repay the bridge before the end of the term of finance.
Loan to value
Typically, bridging loan lenders are prepared to provide up to 75% loan to value (LTV). If you have a larger HMO project and require a higher LTV, depending on the lender, you may be able to use other assets as security and get up to 80% LTV.
Watch our video below - Bridging Loans Explained: Costs, Timescales, Examples, & How To Get One:
Bridging Loan Calculator
Use our bridging finance calculator below to get an indicative quote of what a bridging loan might cost you.
Recent bridging loan rates we've secured for clients:
Rates from: Downsizing/Upsizing Releasing Funds From Your Home Short-Term Lease Finance Auction Purchase As at 17th January 2025 Rates from: Light & Heavy Refurb Finance For Unmortgageable Properties Land Purchase with planning As at 17th January 2025 Rates from: Up to 80% LTV Minimum Loan £500k Minimum net income £100k As at 17th January 2025 Thank You for your interest - please complete the form below and a member of our team will be in contact.Residential
Buying Before Selling?
0.55% pm
Development & Refurb
Fast Finance
0.55% pm
Residential
Large Bridging Loans
0.55% pm
Contact Us
Bridging Loan Application Process
Although traditional lenders’ criteria have made it tougher to access buy to let mortgages, it is still possible to access the finance required for an HMO. Fortunately, some lenders have a more straightforward application process.
Unlike traditional lenders, who require a high rental coverage ratio and implement a strict income test, most bridging loan lenders only need a clear exit plan in place to approve an application. Not only is the application process for a bridging loan often quick, but typically the finance is received faster than other types of finance.
The speed and simplicity of a bridging loan application make bridging finance a viable option when time is of the essence.
How to Get a Bridging Loan
Bridging finance is often not available to the general public. This is because typically bridging loan deals are not often found with high-street lenders and are rarely on comparison websites.
Therefore, if you need a bridging loan for your HMO project then it is advisable to contact a professional broker.
Clifton Private Finance specialises in arranging bespoke financial solutions to help clients source the finance they need. We have a wealth of experience in property finance and understand the importance of readily available finance.
We have strong professional relationships with private banks, specialist lenders, family offices and wealth managers.
We can utilise our network of lenders to identify the best deals for you and negotiate favourably to ensure you can progress with your HMO project.
To investigate how to get a bridging loan to suit your circumstances, call us on 0117 959 5094 or book a free consultation below.
