Changing a Buy To Let to an HMO Mortgage
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Changing a Buy To Let to an HMO Mortgage
Oliver Potter discusses how to change a Buy to Let to an HMO mortgage.
Can I convert my Buy to Let mortgage to an HMO mortgage?
Yes, and in fact a lot of landlords are looking to do this. But it’s not as simple as flicking a switch. We can’t just let a property as an HMO if it’s currently a standard Buy to Let.
From a lender’s perspective, HMOs are a more specialist lending proposition. If the lender you’re currently with for Buy to Let also does HMOs, we can approach them for their consent to switch. But if they don’t do HMOs, we might need to change lenders.
Outside of the mortgage space, it’s worth looking into your local authority’s rules, as HMOs usually need a licence. Essentially, it’s possible, but you would need to look into the details.
Do I need permission from my lender to switch?
Obviously you’ll need permission when you’re actually letting the property out. It’s not just that you could be in breach of the mortgage terms, but also the property may not be set up correctly to be let on an HMO basis.
Breaching your lender’s terms is one thing, but breaching local authority terms is another.
You can land yourself with some serious fines, so don’t risk it.
What are the steps to remortgage from Buy to Let to an HMO?
The first thing is to check your lender’s mortgage terms, to make sure that they offer an HMO proposition and whether they’ll be happy for you to let the property out as an HMO.
Next is to confirm HMO licensing requirements with the local authority, to make sure they’re happy, check what licenses are needed and see whether you need to modify the property to meet the required specifications.
It’s then good to talk to a broker about the best route – whether that’s staying with the same lender or switching. It’s best to find a broker that deals with HMOs, as not all brokers will. HMO propositions are a bit more specialist.
You’ll probably need a property valuation, because the lender needs to make sure it adheres to their criteria and is safe to be tenanted. Once you’ve got the thumbs up from the lender and the local authority, it’s all done.
There’s no more steps than for a regular Buy to Let, but it’s just a bit more involved and much more specialist.
Are there any extra fees to switch to an HMO mortgage?
It depends how we approach it. If we are staying with the same lender, it will usually only be on a short-term basis until your current deal comes to an end. At the end of product expiry, we have free reign to go wherever we want.
Licensing fees with your local council are an additional cost to bear in mind. It’s also worth noting that some councils are okay with HMOs, while others won’t be. Some have a limit to the number of HMOs they allow. They may be full at the time you’re looking to set up your HMO.
There are also valuation costs, and these are usually a bit more expensive than on a standard Buy to Let property as they’re more involved. There’s more to check around fire and safety regulations. With solicitors, too, there’s usually more to check. Plus, there may be costs to get the property up to spec before lender approval.
There’s definitely a higher outlay for HMOs than a standard Buy to Let property, but most landlords expect that. They know that hopefully the money will come back to them once it’s been tenanted.
What criteria do I need to meet to change a Buy to Let to an HMO?
There are usually minimum property sizes and room sizes. You can’t just have a one bedroom flat and turn it into a 10-bed HMO, because people need a certain size of living space.
There are requirements, not just from the local authority, but also from lenders. Do check the regulations around the size of rooms you’re developing or that the property already has.
There are also fire, safety and planning requirements. You can’t just buy a house and turn it into a 10-bed HMO. You will need planning permission and to make sure it’s safe – because there will be more people using electricity and gas. Obviously, it needs to be fire safe, because with more people in a single space there’s a greater fire risk.
There are also standard requirements around the number of tenants, property type and how many storeys are in the property. Whether it’s an ex-local authority property might also have an impact.
With a conversion to an HMO, it’s well worth running through the details with a broker, an architect and your local council, to check that what you’re trying to achieve is compliant and possible before you commit any money.
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Do I need an HMO licence to remortgage?
Usually, yes. Lenders will want to see proof that the property is compliant and can be licensed before they offer terms. For any HMO with five or more tenants, you will need a licence in most locations. Some councils require one for more than three tenants. Do check with your local council, because this can vary a lot.
What interest rates can I expect here? Is there a difference?
HMOs are a slightly more specialised proposition and often require a slightly more specialised lender. Rates are therefore usually a little higher than on Buy to Lets, just because an HMO can be more of a risk to the lender.
Stress testing can also be tougher depending on the lender. Rental income can be assessed more strictly compared to regular Buy to Let, but the affordability is usually okay. Even though it’s stressed at a slightly higher rate, you’ve obviously got more rent coming in overall.
You’ll earn more money from the rent, but the rates and therefore your mortgage payment will probably be a little bit higher.
Will my repayments increase?
Yes, compared with Buy to Let this is definitely a more specialised proposition. Rates will almost definitely be higher, and higher fees too. But usually there’s a higher rental yield with multiple tenants as opposed to just one individual or one family.
Can I stay with the same lender?
There’s a possibility to stay with them, but we will always run the costs of staying with the same lender compared with switching.
A lot of people do end up switching, just because HMOs are that much more specialised.
How long does it take to switch from a Buy to Let to an HMO mortgage?
It depends what stage we’re starting at. If you’ve already got council licence approval and all of the specs are done in terms of fire and safety, the actual remortgage process could take anywhere from four to eight weeks.
Getting a mortgage offer shouldn’t take too long. The solicitors will take probably two or three weeks after that to complete – so four to eight weeks.
If you still need council licensing approval and to get the property up to spec, it’s more ambiguous. It depends how long the council takes – usually a couple of weeks, perhaps quicker, and it depends on the building work.
What happens if I don’t tell my lender that I want to switch?
If you go ahead, you’re breaching your mortgage terms. A lender could demand their full mortgage sum back. We would have to renegotiate the deal with another lender, which may cost time and money.
Also, any insurance on the property could become invalid – whether that be home insurance, contents insurance or any other cover. It’s just like car insurance. If you buy a car, insure it and then put a different engine in and new wheels, that will render your insurance invalid.
The other big risk is a fine from the council. It’s one thing breaching lenders’ terms, but anything associated with a council licence could result in really big fines.
Worst of all, imagine the property was rented out on an HMO basis but just listed as a standard Buy to Let and there was a fire. If someone were injured or passed away, that’s a landlord’s worst nightmare.
Without meeting all the requirements, you wouldn’t just be looking at financial cost – you could be looking at prison time. It’s just not worth it, especially in the HMO sector.
You’ve demonstrated this already, but how can a mortgage broker help here?
Even though we’ve touched on the more worrying things, it shows how important it is to talk to a broker that is proficient and aware of how HMOs work. We know which lenders will have criteria to suit you.
Check whether the broker has a limited panel – because HMOs tend to require access to a wider lender pool because it’s more specialised. Some brokers won’t do these mortgages, but a good one will save you time approaching lenders with Buy to Let criteria.
We also help with the standard stuff – comparing rates and fees, ensuring profitability, and supporting you all the way through. We’re here to get you across the line, essentially.
Even for the most proficient and experienced landlord, HMOs are much more involved and the mortgages can be confusing sometimes. Make sure you’ve got someone in your corner that knows what they’re doing.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE SOME FORMS OF BUY TO LET MORTGAGE.