HMO lender appetite back to pre-pandemic levels but high LTVs scarce

  • 14/12/2021
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HMO lender appetite back to pre-pandemic levels but high LTVs scarce
Mortgage lender appetite for houses in multiple occupation (HMO) has returned to near pre-pandemic levels but borrowing at higher loan to value (LTV) bands remains a challenge, according to brokers.


Brokers speaking to this publication say that they have seen an uptick in HMO enquiries over the past few months, pointing to lender’s criteria relaxing and higher rental yield from HMO properties.

During the pandemic, HMO lending became constricted with lenders reducing the LTV available or tightening criteria. This was partially due to uncertainty around student lets.

This has started to change, with many lenders now back to pre-pandemic criteria and those who exited the market now returned, such as The Mortgage Works and Leeds Building Society.

Vincent Burch, mortgage director at independent mortgage broker Vincent Burch, said: “Lenders had a lack of appetite to lend on student lets and often the lenders who would consider lending, were looking at every university on their own merits. Unfortunately, many lenders pulled out from the market altogether, with the uncertainty surrounding students returning to campus.”

Paul Brett, managing director for intermediaries at buy-to-let specialist Landbay, said HMO enquiries to the lender had picked up after the first lockdown of the year and it had a really strong Q4 2020. He added that this year had been good for HMO business.

He said: “There is certainly an appetite for HMOs and July was a record month for us in terms of applications. Rental yields are higher on HMOs than single unit properties so more landlords are looking at this, especially in university towns and cities to cater for the student market. But well-presented shared houses also appeal to young professionals particularly if they have en-suite facilities.”

Criteria limits and other challenges

However, Burch added that lending at higher LTV bands such as 85 per cent LTV was more limited with only one lender currently offering an HMO product in that tier.

Matthew Rowne, director of The Buy To Let Broker, added that some lenders would cap HMOs at six rooms, but there were many specialist lenders and products that could cater for larger HMO properties at very competitive rates.

He added that on certain lenders on case-specific basis may request proof of funds for potential rental voids and some lenders would require landlord experience for HMO lending.

Burch added that another challenge was that more councils were requiring HMO license than ever before, making it more challenging from an administrative perspective to convert a property to an HMO and rent it out.

To rent a large HMO, which the government defined as a property rented to five or more people who form more than one household, you need to obtain a licence every five years and a separate licence is needed for each HMO.

An HMO licence also requires landlords to send the council an updated gas safety certificate every year, install and maintain smoke alarms and provide safety certification for all electrical appliances on request.

Burch said that he expected more councils to require this kind of paperwork in the future.

Brett added: “One of the key challenges for all landlords is improving their properties to reach an EPC rating of C by 2025 for new tenancies or 2028 for existing tenancies. Many HMOs are older, large, converted houses which are not energy efficient, and it could be costly to upgrade. However, with more green mortgages coming into the market, landlords would get a lower rate if they retrofit their properties.

“Having said that, we have seen a few newer properties that have been converted to HMOs and they have an EPC rating of C or even B.”

First-time landlords considering HMOs

Brokers also pointed to more first-time landlords enquiring about the HMO space, adding that previously HMO landlords tended to be professional landlords.

Rowne said anecdotally it was seeing more first-time landlords looking at HMOs to achieve more attractive yields.

Brett said that whilst much of its lending was to experienced landlords, it had introduced a first-time HMO landlord range earlier this year,

He said: “These tend to be very keen, astute young people who have not been landlords before but have studied the market and know what they need to do.”

He added that the range had proven popular amongst brokers and customers.

Outlook for HMOs

Overall, brokers said that they expect HMOs to grow in popularity due to their higher and more sustainable rental yields.

Brett explained: “I expect HMO lending to go from strength to strength. With people returning to work in the big towns and cities, there will be more demand for rental accommodation. Often shared housing is all people can afford or they may just want somewhere to stay for a few days a week.”

“HMOs are an attractive investment for buy-to-let landlords. If there are vacant rooms, income is still coming in from the other occupants and of course rental yields are higher.”

He added that rates in the market were still “very competitive” and even with potential rate rises, mortgages were still “historically cheap”.

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