Bridging Loans for HMOs

An HMO bridging loan is short-term finance secured on a property being bought or converted into a house in multiple occupation (HMO), repaid by an HMO mortgage or sale once the property is licensed and let.

A bridge suits HMO projects because the property often needs conversion, licensing and letting before an HMO mortgage lender will lend, and because purchases may need to complete quickly. The bridge buys the time those steps take.

You can convert a house to an HMO with a bridging loan funding the purchase and, with some lenders, the works in stages. Planning and licensing requirements are checked before buying.

Some bridging lenders fund conversion works in stages after inspections, with the total capped by a percentage of the value after works. Others fund only the purchase, leaving works to be funded from savings.

A bridge can fund buying an unlicensed or substandard HMO and the works to bring it to licensing standard. The HMO mortgage exit depends on obtaining the licence.

Some lenders offer HMO bridging to first-time HMO investors, often with lower loan-to-values or a requirement for prior landlord experience. The HMO mortgage exit may also require experience. Prior single-let experience often widens choice.

An HMO conversion commonly takes a few months, plus time for licensing and letting rooms. The bridge term should cover works, licensing, lettings and the HMO mortgage application. Allowing extra time for licensing avoids an expensive extension.

In England, an HMO needs a mandatory licence if five or more people forming two or more households live there. Councils can also require additional or selective licences for smaller HMOs or areas.

An Article 4 direction is a council order removing permitted development rights in an area — for HMOs, the right to change a house (use class C3) to a small house in multiple occupation (use class C4) without planning permission.

A small HMO for three to six people can often be created under permitted development, unless an Article 4 direction applies. An HMO for seven or more occupants is sui generis and needs planning permission.

In licensed HMOs in England, a bedroom for one adult must be at least 6.51 square metres and for two adults at least 10.22 square metres, under the mandatory licence conditions.

HMOs need fire safety measures such as fire doors, alarms and escape routes appropriate to their size and layout, assessed under housing fire safety guidance and licensing conditions.

Most HMO mortgage lenders require a licence where one is legally needed, or evidence of an application, before lending. Bridging lenders may lend before licensing, with the licence as part of the exit.

HMOs are valued either on bricks-and-mortar value, as a house, or on investment value based on rental income. Investment value is often higher for well-let HMOs.

Investment value, based on rental income, usually supports a larger HMO mortgage than bricks-and-mortar value for a well-let HMO. Lenders differ, so the basis is agreed before relying on it as the exit.

Many HMO lenders set limits on the number of bedrooms or occupants, with larger HMOs going to specialist lenders. The size is checked against the exit lender's criteria before conversion.

The usual exit is an HMO mortgage once the property is licensed and let, assessed on value and on the rent against the lender's stress test. A sale is the alternative.

HMO mortgage lenders stress-test the total room rents against interest at their stress rate and interest cover ratio, alongside loan-to-value. Vacant rooms are usually assessed on achievable market rent. Some lenders also apply their own rent assumptions.

Limited companies and special purpose vehicles (SPVs) commonly bridge HMOs, with directors' personal guarantees, then refinance onto limited company HMO mortgages. Holding the HMO in a company can suit investors whose tax position favours company ownership, which an accountant confirms before buying.

HMO bridging is usually unregulated commercial lending, because the investor does not live in the property. Occupation or intended occupation by the borrower or a related person can change the position. The lender must check the borrower, land use and applicable exemptions.