Demand for HMO rises as landlords hunt for higher yields

Shawbrook Bank has reported a proportional rise in HMO completions against the rest of its buy-to-let (BTL) book.

Last year, the specialist lender saw 27 per cent of its buy-to-let business secured against HMO properties, which was the same as 2022. This year, however, the bank’s HMO split is already at 34 per cent.

HMO take up by non-portfolio landlords has also risen from 17 per cent to 21 per cent over the same period suggesting a rise in landlords new to the product.

Daryl Norkett, director of real estate proposition, said: “The rise is down to a combination of factors. We’re starting to see buy-to-let activity return to the market and HMO is a great strategy that works well for professional property investors. We’re also well known for being a sophisticated HMO lender so we get a good share of business off the back of that reputation.

“HMOs are also a robust type of application. They stand up as you get deeper into the underwriting process. Where you have tight affordability on a traditional buy-to-let, all you need is for the valuation to go slightly wrong and all of a sudden the deal doesn’t work anymore for the borrower. Whereas an HMO would probably still have some room in it.”

HMOs, he adds, offer landlords the opportunity to keep pace with market rents because of the higher turnover in tenants. Landlords are also looking to convert lower yielding family buy-to-lets into HMOs by reconfiguring the layout, adding an extension or converting loft space into an extra bedroom.

Norkett says that when interest rates do start to fall, he expects to see the modest rise in HMO business seen so far this year turn into an “explosion of growth”.

Brokers are also reporting a rise in HMO enquiries and due to the increase in demand, lenders are changing criteria to capture a bigger share of the market.

Lenders trying to attract HMO business

Criteria changes include increasing the number of beds allowed in a HMO property upwards of the typical six bedroom limit. Some lenders have increased their limit to eight or ten while specialist lenders which already accepted this number of bedrooms have upped their cap to 15 to 20.

Meanwhile, some HMO lenders have reduced the number of bedrooms required to meet the criteria to have an investment or yield-based valuation.

Last September, Shawbrook also improved its HMO criteria to help landlords achieve larger maximum loans. It reduced its debt servicing cover ratio from 165 per cent cover to 130 per cent for limited companies and for individuals from 190 per cent to 165 per cent.

David Gissing, specialist finance adviser at LDN Finance, said: “We have seen a rise in HMO enquiries, purchases and certainly conversions in the past 12 months. With BTL stress tests increasing, reduced affordability and squeezed margins, investors are looking for alternative options to increase yields and profit margins.

“Some existing clients are converting their already owned BTL properties into HMOs. Others are purchasing HMOs and properties that require refurbishment to convert to HMO. Many lenders have increased appetites and have amended their lending criteria in favour of HMO applications. My only advice to landlords prior to getting involved with HMOs is to make sure you fully understand the legal requirements and legislation of running an HMO property first.”

If you are interested in learning more about the BTL sector, then register for The Buy to Let Forum, which takes place between 24 April and 2 May in Bolton, Birmingham, Cardiff and Reading.