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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.
Written by: Sam O'Neill & Sam Hodgson
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.
Sam O'Neill
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 9th September 2024 Rates from: Light & Heavy Refurb Finance For Unmortgageable Properties Land Purchase with planning As at 9th September 2024 Rates from: Up to 80% LTV Minimum Loan £500k Minimum net income £100k As at 9th September 2024 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
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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.
FAQs
Understanding the difference between net and gross calculations is essential when comparing deals from bridging loan lenders. The calculation determines the maximum LTV (Loan-to-Value), how much you can borrow, and how much you will eventually repay. Here’s the difference: When calculating the net loan amount for bridging loans, the borrower deducts the loan costs and additional fees (such as the arrangement fee) from the total loan amount - this is known as net loan calculation. Contrary to that, gross loan calculation is based on the loan amount the borrower can receive without deducting any costs or fees. In brief, the gross loan calculation represents the total amount available to the borrower, while the net loan represents what the borrower ultimately receives after deductions. A common complication arises when it comes to comparing bridging lenders, as different lenders advertise their bridging loan products differently. The upshot of this, is that it can become difficult to determine if a higher LTV (loan-to-value) represents the actual amount you could receive. Lenders typically use a gross loan calculation when advertising or promoting their bridging loan products. This is because the gross loan amount represents the maximum loan amount the borrower is eligible to receive, and can be used as a marketing tool to attract potential borrowers. Nevertheless, the net loan calculation is used when negotiating an agreement, which is the amount the borrower will receive after deducting fees and other costs. Borrowers are responsible for repaying this amount, and lenders will use that amount to determine repayment schedules and other loan terms. How a broker can help with bridging loan calculations A broker can assist with bridging loan calculations by providing clarity, expertise, negotiation skills, and a comparison of loan options to help you make more informed decisions. A first charge bridging loan refers to a bridging loan that is the only charge against the property, i.e., there is no existing mortgage on that property. A second charge bridging loan is when there is already a mortgage on the property that the bridging loan is being secured against. In the event of repossession, the 'first charge' has the legal right to be repaid first, before the second charge, which is why second charge loans can be slightly more expensive as they're a greater risk to lenders. It is still entirely possible to secure a second-charge bridging loan and they are common within the industry. Yes, you can get a bridging loan with bad credit. While lenders will look at your credit score and factor it into your application, there is no requirement for regular loan servicing with a bridging loan, and so your income is not analysed and your credit score is significantly less important than with a mortgage. Almost all regulated bridging loans are short-term, and have a duration of 12 months. Bridging loans are short-term by nature. However, there can be some flexibility on term length, particularly for unregulated bridging. For example, bridging for development projects, flipping properties, buy to let bridging loans and commercial bridging loans can all have longer terms up to 36 months. Some bridging loan lenders allow you to extend your term if at the end of 12 months your property hasn't sold or your alternative funding hasn't come through yet - however, this is down to the lender's discretion and there are no guarantees. It's important to be aware of the risks of bridging loans, and your property can be seized and sold to compensate for failure to repay. A bridging loan exit strategy is simply the way in which you plan to repay your bridging loan. The most common exit strategies are selling an existing property, selling the property you're purchasing, refinancing with a mortgage, or a combination. Other more unique exit strategies can include selling a business, receiving a pending inheritance, or receiving a large tax rebate. Here are some of the most common alternatives to bridging loans: We break down each of these other financing tools in our full guide to alternatives to bridging loans. While none of these options provide the flexibility, loan size and low interest rates that bridging loans do for property transactions, you may find they are more appropriate finance options for your specific situation. No, there is no strict age limit for securing a bridging loan. Bridging loans are typically 12 months in duration, which means that there aren't age limits in place like there are for mortgages that can last for 25+ years. The main example where age may be an issue is if you plan to refinance your bridging loan with a standard mortgage. In which case, you'll need to be eligible for a standard mortgage to qualify for your bridging loan - and if you are approaching retirement age, this could be an issue and you may be rejected for a bridging loan. However, we work with specialist equity release and lifetime mortgage lenders that can provide a Decision in Principle for later-life lending (if it's feasible) so that your bridging loan can be approved if it makes sense with your broader strategy. There are two types of bridging finance: regulated bridging loans and unregulated bridging loans. It simply depends on the intended use of the property you're purchasing. When you or a family member intend to live in the property you’re purchasing with your bridging loan, you’ll need a regulated bridging loan. If you're getting bridging finance on property that you or a family member will not be living in, or if it’s a commercial property, then you’ll need an unregulated bridging loan (commercial bridge loan). And if you intend to sell the property to repay your bridging loan (flipping the property) instead of refinancing or selling another property, you’ll get an unregulated bridge loan. Regulated bridging loans are authorised and regulated by the FCA and are usually locked to a 12-month maximum term. Unregulated bridging loans, meanwhile, can have extended periods of up to 36 months and are generally more flexible. If you’re unsure, it’s best to speak to a qualified adviser to go over exactly what you need and find the best bridging loan for you. Yes, your bridging loan lender will require a new valuation to be carried out for all properties in your bridging loan transaction. In some cases, we can work with lenders that can facilitate a 'desk valuation', which is a valuation carried out online based on the local property market, images of the property and the specifications of the home - this can save a considerable amount in fees and speed up your application, but it's not always possible, especially for higher value properties. You can borrow up to £25m with bridging finance, but it’s typically capped at about 80% of the value of the property you’re using as security. It's important to note that different lenders have varying policies and criteria regarding the maximum loan amounts they offer for bridging finance. Some lenders have a maximum limit of over £1 million, while others may specialize in smaller loan amounts. Additionally, the terms and conditions of the loan, including interest rates and fees, should also be taken into consideration when determining the overall affordability of the bridging loan. You don't necessarily need a deposit for a bridging loan in the traditional sense of cash reserves, but you do need security for your loan in the form of another property or asset to keep the loan-to-value below 80% at a maximum. For example, if you're buying a £300k property with a £300k bridging loan, you'd need another property to secure the loan against along with the property you're buying, or else your loan to value would be 100%. You can effectively secure a loan for 100% of a property value, but only if you have other property as security to keep your overall loan-to-value below 80%. So, if you're getting a loan for 100% of a property value, you'll need another property in the background to secure it against. The easiest way to see if you're eligible is either to give us a call or use our bridging loan calculator that automatically calculates your LTV. Using funds from a bridging loan to purchase a property puts you in a strong position as a buyer - similar to that of a cash buyer. Being a cash buyer is attractive to sellers because there is no onward chain requirement, and the funds are ready to go for the purchase. Using a bridging loan also eliminates the need for the chain to complete, and puts you in a position where funds can be available in a matter of weeks for completion; effectively rendering you a cash buyer to prospective sellers. Regulated bridging loans (for residential properties) are typically 12 months, however, some non-regulated bridging loans for buy to lets and commercial properties can be up to 36 months. Some lenders are more flexible on term durations than others, and it can be a case-by-case basis as to whether you'll get approval for a longer loan term. Yes, you can use a bridging loan to pay Stamp Duty. This amount could be covered by a bridging loan, providing you have a way to repay the additional borrowing amount to your lender. Yes, bridging loans are generally considered safe provided they are used for suitable property transactions. Speaking to a bridging loan adviser is recommended if you're unsure about the risks and suitability of a bridging loan for your situation. Generally speaking, the main risk of a bridging loan is that if you cannot repay the loan, your property can be repossessed and sold to clear your debt. For example, if you take out a bridging loan to buy a new property but your existing property fails to sell and you cannot recoup the funds, this could become a risk. However, bridging lenders always require their own valuations for any property involved in a bridging transaction to combat this. Another example could be that you're unable to secure a mortgage to refinance your bridging loan. At Clifton, we make sure your remortgage plans are sound if this is your bridging loan exit strategy, and can even arrange your mortgage for you through our dedicated mortgage advice service on the other side to smooth the process. Bridging loans are designed to be short-term so there’s no maximum age limit when applying for a bridging loan. This does depend on the lender, as some bridging lenders do have an upper age limit, but there are lenders on the market who offer bridging loans for borrowers aged 70 and over. Bridging loan interest rates usually range between 0.45% - 2% per month, depending on the case and the market rate. Unlike mortgage interest rates, bridging loan interest is calculated monthly instead of yearly. This is because bridging loans are short-term and, in many cases, repaid within a year. Bridging loans can be arranged without early repayment penalties, so interest is calculated monthly to ensure you only pay interest on the months you have the loan for. No high street banks currently offer bridging loans. Instead, bridging loans are provided by specialist short-term finance lenders. At Clifton Private Finance, we are a whole of market brokerage that deals with multiple bridging loan lenders, and we act as an intermediary between clients and the lender ensuring the process is smooth and hassle-free, and making sure our clients are getting a good deal. Banks typically charge two main fees when taking out a bridging loan – arrangement fees and interest. But there are other costs to consider such as valuation fees, broker fees and administration fees. Costs can vary from lender to lender, and will also depend on what your bridging loan is for (e.g., residential or commercial purposes.) Arrangement fees are what the lender charges you to take out the loan and can range between 1.5 - 3% of your overall loan. Bridging loan interest, on the other hand, is calculated monthly. This can catch borrowers out who may be expecting an Annual Percentage Rate (APR) like with a mortgage. You cannot turn a bridging loan into a mortgage, but you can repay a bridging loan with a mortgage and effectively refinance it into a long-term arrangement. This is common when buying an unmortgageable property with a bridging loan, carrying out refurbishments, and then mortgaging it once it is wind and water-tight and a new valuation has been carried out. This is also common for properties bought at auction where a mortgage would be too slow to arrange, and so a bridging loan is used which is then replaced with a mortgage later. Yes, bridging loans are typically more expensive than mortgages. Bridging loan interest rates can be much higher than a mortgage, and are calculated and displayed as monthly rates instead of the usual annual percentage rate (APR) that you’ll see on a mortgage. However, bridging loans are a short-term solution, and you’ll only pay interest on the months you’ve borrowed money for – and you can repay early without any charges (for most loans). There are many circumstances where bridging loans are an affordable option and a means to an end - for borrowers that need to finance a property purchase quickly, it may be the only option available. If there is a purchase involved, bridging loans are paid from the lender to the lender’s solicitor, then to the client’s solicitor, and then to the seller’s solicitor - so, you as a client will not see the funds in your own account - similar to a mortgage. If there is no purchase involved (for example, for a bridging loan for home improvements before selling), the funds go from the lender to the lender's solicitor, to the client’s solicitor, and then to the client's bank account. In terms of how bridging loans are repaid by you, they are repaid as a lump sum, either at the end of your term or during it. You can choose to either 'service' the interest, so pay the interest back monthly, or roll it up into the value of the loan to also pay this off as a lump sum along with the capital. In most cases, a bridging loan will require a minimum deposit of 25%. However, the minimum can vary depending on the lender and the specific circumstances of the loan itself. Generally, bridging loans are secured against a property or other valuable assets, and the deposit required is often expressed as a percentage of the property's value, known as the loan-to-value ratio. In some cases, 0% deposit bridging loans are an option, but only if you have other property or assets in the background to provide additional security. You do not pay monthly instalments towards the capital loan of your bridging loan. Some bridging loans require you to repay the interest accrued each month, but most lenders will actually give you the option to roll this up into the loan value, meaning you repay it with your lump sum at the end and have absolutely no monthly commitments. It's worth noting that as soon as you pay off most bridging loans, you stop accruing interest - so, the quicker you pay it off, the less expensive it will be, and there are typically no ERCs (early repayment charges). Bridging loans can be arranged in as little as 7 working days. However, it depends on the complexity of the bridge loan and your specific circumstances. It may also be more expensive for you to rush an urgent application through – but not impossible. Bridging loans are a popular option for borrowers who are under time constraints, such as buying a property at auction or breaking a chain. The key factors lenders tend to consider are: Security - Bridging finance is usually secured against property or other valuable assets. Lenders will assess the value and marketability of your security. Exit Strategy - Lenders will want to understand how you plan to repay your bridging loan. In most cases, this is selling your old property, selling the new property (flipping), or refinancing with a long-term mortgage. Loan-to-Value (LTV) Ratio - Lenders consider the loan amount compared to the value of the property being used as security as a percentage. The LTV ratio can vary, but most lenders will have a maximum of 60-80% LTV. Remember, the criteria for obtaining bridging finance in the UK can vary depending on the lender and your circumstances.
What are net vs gross bridging loan calculations?
Which calculation do lenders use for bridging loans?
What is the difference between first-charge and second-charge bridging loans?
Can you get a bridging loan with bad credit?
How short-term are bridging loans?
What are bridging loan exit strategies?
What are some alternatives to bridging loans?
Is there an age limit on bridging loans?
Are bridging loans regulated?
Do you need a valuation for a bridging loan?
How much can you borrow with bridging finance?
Do you need a deposit for a bridging loan?
Can I get 100% bridging finance?
Does a bridging loan make you a cash buyer?
What is the longest bridging loan term?
Can I use a bridging loan to pay stamp duty?
Are bridging loans safe?
Can an 80 year old get a bridging loan?
What is the monthly interest rate on a bridging loan?
Do banks still do bridging loans?
How much do banks charge for bridging loans?
Can you turn a bridging loan into a mortgage?
Is a bridging loan more expensive than a mortgage?
How are bridging loans paid?
What is the minimum deposit for a bridging loan?
Do you pay monthly payments on a bridging loan?
How long does it take for a bridging loan to come through?
What is the criteria for bridging finance?
