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How can my client bypass the HMO rules for buy to let?

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  • 03/11/2003
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My client is looking into buying a house that will fall under multiple occupancy rules. Can he get round them by renting the property to one person who then sub-lets it, and which lenders would take on this type of mortgage?

Many lenders will not accept a mortgage on a multi-let scheme, they will only lend on the basis of a single tenant and this client could therefore be in breach of their mortgage contract if the property was sub-let without authority. This scenario is not unique given the increasing popularity of multiple occupation and some lenders provide a buy-to-let mortgage which will allow your client’s property to be let out to multiple occupants.

One example is Chelsea Building Society which will allow the owner of the property to rent it out freely. The Society would not specifically need to know the names of the occupants or their personal details. Such a lending policy is well suited to buy-to-let properties intended for student occupation. In Chelsea Building Society’s case, the maximum number of occupants permitted is five and the owner must not reside at the property. Many lenders have restrictions on the property design in terms of rooms and facilities. In this respect, Chelsea stipulates that the property mortgaged to them may only have one kitchen. Such a product is available with a one year discount, taking the payable rate to 4.19%, with a maximum loan to value of 80%.

Alternatively, Mortgage Express will allow a maximum of seven professional people or seven bedrooms to rent, under its multiple occupancy scheme. Any of the Mortgage Express buy-to-let products are available on this scheme: one example product is a 4.99% discounted rate for three years.

One thing all lenders should insist on is an Assured Shorthold Tenancy (AST) which is usually a six month agreement entered into by tenants whose occupancy is then reviewed every six months. All tenancy agreements under the multiple arrangement should have a common end date, so a tenant joining the property two months after the first tenant would have a four month AST. This allows the landlord the choice to terminate, renew or continue all of the sub-leases on a single date.

Most buy-to-let lenders are happy to lend in the market where it is perceived that the borrower will let the property to one tenant on an AST agreement. However lenders shy away from lending on properties which are classed as Houses of Multiple Occupancy (HMO), which means multiple tenants on multiple ASTs, particularly if they are arranged as bedsits.

If the client is buying a property which is set out as a HMO (that is with separate locks on all bedrooms and kitchenette facilities within the rooms) and perhaps with shared bathroom facilities, this would be identified as such by the valuer and mainstream lenders would not lend on this type of property irrespective of the tenancy arrangements. The additional complication for the client is that this type of property is now very heavily regulated by local authorities and needs all sorts of additional fire precautions and safety features installed. Again this is something that mainstream buy-to-let lenders would not consider lending on.

You can see the problem for a lender in trying to recover its borrowing when the security property is occupied by five or six tenants all with their own tenancy agreement and their own accommodation within the property. The issue of a single tenant taking on a property and then sub-letting rooms in the property is not something lenders would be happy to entertain for the reasons outlined above when it came to enforcing their security. There are some non-conforming lenders that would consider this type of deal but at relatively low LTV’s only.

However if the property is not separated into individual units but is let on a shared basis where even though the tenants may be on individual tenancies but they share common facilities such as kitchen, bathroom and lounge, then mainstream buy-to-let lenders generally do not have a problem with this.

GMAC RFC has been receiving a growing number of enquiries regarding cases similar to this, particularly for property being purchased in student towns. And more often than not, GMAC RFC is able to provide a mortgage.

First off however, I must make some assumptions. These are that the client is at least 25 years of age, is not a first-time-buyer and has at least a 15% deposit available. For the purposes of this example I will also assume that the client has a clean credit history, and that the property will not be let to anyone on State benefits.

At GMAC RFC we would be able to help this client, on the basis there is no more than four people living in the house. We would ask that there is just one tenancy agreement and that it is on an assured shorthold basis – normally six months.

With GMAC RFC, it would be possible to buy an ex-local authority house that can be let out, subject to the property being of good marketability.

For buy to let we lend based upon the rental value of the property, with the rental income being 130% of the mortgage interest. It is also worth mentioning here that the valuer will base his assessment of the rental value on a normal ‘family’ let and not on a student let basis.

So assuming that all these criteria are met, then we have a range of rates available, depending upon the LTV.

The most popular products at present are the two tracker rates, currently at 4.49% and 4.99%, which are lifetime trackers following the Bank of England Base rate (at 0.99% and 1.49% over for cases with a 15% and 25% deposit respectively). And for the tracker the loan to rent calculation is calculated at the pay rate.

We would also ask that the property is let via a recognised letting agent (such as ARLA).

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