Prepare for PRA rules to drive up HMO interest – Liz Syms

The paper, Underwriting standards for buy-to-let mortgage contracts, confirmed the outcome of the consultation paper issued to the industry in March. Consultation is a loose word, as many believed that the proposals were more directive that consultative and it is noticeable that in broad terms there is very little difference from the consultation paper to the finalised supervisory statement.

Over the coming months it will be interesting to see the reaction from the lenders as they look to interpret the rules into their product offerings.

There is no doubt we will see more lenders shifting towards the higher rental calculation requirements such as TMW’s 145% of a notional 5.5% although they are some exceptions like five-year or more fixed rates and also like for like remortgages.

With the increasing rental requirements, it will be interesting to see how property investors react. Will they, for example, be drawn to investing in commercial and semi-commercial properties, which fall outside of the PRAs proposals?

Investors are also likely to consider higher yielding properties such as HMOs (Houses in Multiple Occupation) and multi-let properties as the higher rental income will help increase the loan-to-value ratio available from lenders.

Now would be a good time for mortgage advisers, not already in the HMO market, to familiarise themselves with some of the rules and regulations relating to these property types and the varying lender criteria.

HMOs

To understand this market, you first need to the understand licence requirements of a HMO.
It is mandatory for a landlord to have a licence on a property if there are three or more floors and five or more tenants and shared facilities. To obtain a licence, the landlord will need to demonstrate the property meets building and fire regulations.

Where a mandatory licence is not required, for example, a property with just two stories, the local authority can still require a licence by using additional or selective licencing powers. This means an adviser should direct their clients who are considering purchasing a HMO property to the local authority to confirm any licence requirements.

The reason why this is important from a mortgage criteria perspective is that some lenders will only consider HMO properties that do not require a licence, for example a four-bedroom property over two floors may be multi-let without a licence in some localities.

Other factors of criteria are also taken into account such as; the number of tenants, if there are locks on the internal doors, if the tenants are all named on one tenancy agreement and also the experience of the property investor.

BM Solutions is a good example. It will consider a licensed HMO but with a maximum of five tenants on one single tenancy agreement. Fleet and Precise will consider both licensed and unlicensed HMOs, but will offer unlicensed HMOs on their standard buy-to-let range. However, if the property has locks on the internal doors the mortgage can only proceed on the more expensive HMO ranges.

Larger HMOs, such as those with 10 or more tenants, will need to be placed with specialist lenders like Shawbrook, Paragon and Interbay.

Unfortunately, most sourcing systems are not sufficient in this kind of detail, so it is essential to spend time understanding lenders’ criteria before giving advice.

The buy-to-let market is facing a number of challenges, and the PRA supervisory statement is just one of them. Advisers willing to take on the challenge of increasing their knowledge in the specialist areas will be well placed to maximise the opportunities the changes will also bring.