HMO Bridging Loan
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HMO Bridging Loan
Adam Messer is here to explain how a bridging loan for an HMO works.
Can I get a bridging loan for HMOs?
Yes, absolutely. Typically we see this scenario when you’re buying a property that isn’t an HMO yet, but you want to turn it into one.
If you’re buying a property that’s already an HMO and you’re going to keep it as one, you probably wouldn’t need a bridging loan. You’d just take a normal HMO mortgage on that.
To turn a property into an HMO, a bridging loan is probably the only option. You’re going to buy a normal house, add some rooms, possibly extend it. Once you change the purpose of that home, a standard lender won’t like that. So we’d take a bridging loan, and once it’s done we’ll refinance it to an HMO mortgage.
What is the typical Loan to Value (LTV) ratio for HMO bridging loans?
Typically it’s up to 75%, but that is a gross loan figure, so that generally includes interest. So you’re actually going to get just under 70%.
If you’re doing a 12-month bridge, the lender will factor in a year’s interest payments, so you end up with a net loan just below 70%.
We have some content on refurb bridging loans and this is similar. We borrow the money to buy the property in the first place, contributing up to 70% or 75% of its value. Then we can potentially get all the money we need to do the refurb as well, based on the finished value.
We’ve helped a few people buy a rundown property, funding the actual purchase and the refurb works to turn it into an HMO. It’s then worth more afterwards, and we refinance it onto an HMO product.
It won’t be long before you get your money back, so that’s a really good way of doing it.
What are the typical lengths of bridging loan terms available for an HMO?
Typically we’d look at a 12 month term. It could be shorter or longer, but 12 months is the standard.
Six months is great as a time to aim for, because after six months, we can refinance the property back to a mortgage product. The lender will look at the new value. So you can aim for six months but your actual bridging loan will probably last up to 12.
You can get slightly longer, as well, if you need it. But obviously, the shorter, the better when it comes to bridging.
How is affordability calculated for an HMO bridging loan? Is potential rental income taken into account?
Not so much, actually. Affordability with bridging loans is a little different. With a bridging loan, generally you’re not paying the interest. It’s rolled up and paid at the end.
The lender hasn’t got to assess your affordability to make the monthly payments because there aren’t any. It’s all about the deal itself and how it stacks up. What are you buying it for? How much deposit have you got? Is there work to be done? What’s it going to be worth at the end?
All those factors go towards how much you can borrow. The lender probably will ask about future rental income, but only so they know you can refinance – they always want to know what the exit strategy is. In this case, the strategy is to refinance onto an HMO product.
How quickly can the funds be released after application approval?
It’s pretty quick with a bridging loan – usually a few weeks from start to finish. There are lenders that can go really quick and release funds in a couple of weeks, but you tend to pay for that on the rate.
Typically, most cases go through in four to six weeks. That’s the norm. I’ve had a couple lately that have been four weeks or so. That tends to fit with most people. If you agree to buy a property today, it’s unlikely anyone’s going to expect you to complete in two weeks. Once the actual loan is agreed, the funds are released straight away.
Can I use the bridging loan to fund renovations or improvements to the HMO? If so, are there any conditions?
Yes, we can take a loan to buy the property, renovate it and change its use into an HMO.
We can borrow the money to do that.
We have to tell the lender at the start what we’re going to do. They’ll check that you’re doing what you say you will. In terms of conditions, it has to be worth more at the end than it was at the start – but you wouldn’t do it otherwise, would you?
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Can I get a bridging loan for HMOs that require planning permission changes or refurbishments?
Yes in terms of refurbishments. Planning permission is slightly different. If it’s got planning, obviously, you can crack on and the lender will fund the work.
If you want to do something that will need planning, and you need to go off and get that, we need to look at it in two parts. So the lender will lend their money for the purchase, but then you can’t do anything until you’ve got the planning, and they will wait.
Some lenders will then just give you the money for the refurb as planned. Others will want us to change the application and go through it again. If you haven’t got planning permission, that’s an extra factor, an extra complication, but it’s certainly not a problem.
Can a bridging loan be used to purchase an HMO at auction?
Yes, definitely. Auctions tend to need to be quicker, so we would go with a lender that can cope with an auction purchase.
If you’re going to an auction and you’re looking at a couple of properties, let’s get some groundwork done. Let’s get you agreed in principle with a lender on board and ready. Then, on the afternoon of the auction if you are successful we can get the application started.
I’ve had clients before who arrive having bought a property at auction a week ago and they need to complete next week. I can make that work, but the rate is not going to be pretty. The more time you can give us, the better.
How do I apply for an HMO bridging loan?
With these more specialist lenders, it’s not like going to a high street bank, filling in their online forms and then the computer does it all.
With some bridging lenders, we just send the details on an email and they put it all together. Others have an online portal to use. It varies, but it’s a much more bespoke, manual process than a normal mortgage.
You’re best off through a broker, as we’ll be able to speak to lots of different lenders at the same time.
What documentation will I need to provide?
We’re going to need ID, proof of address and three months’ bank statements – all the normal money laundering and ID checks. We will want to know a bit about your income with your payslips or tax returns, depending on what you do.
Then we’re going to want some information about the property. There’s no documentation, necessarily, but we might want sales particulars and property details to build up the case and what the plan is.
On a refurb, we’re probably going to want a schedule of works. If it’s an auction purchase, we’re not going to have time for any of this. You just need to buy the property and sort out the refurb later on.
The lender will want a schedule of works and costings to assess that it’s going to be worth enough at the end. They’re going to want to do a valuation. So there are various steps, but it’s not as onerous as a regulated mortgage application – it’s a bit more bespoke.
What exit strategies do you typically see for HMO bridging loans?
Typically you want to turn a property into an HMO and then let it out. So once it’s done, we’ll refinance it onto an HMO specific product. There are lenders we go to for HMO mortgages who are set up especially for that.
Some lend based on a bricks and mortar value of the property, and some are based on more of a commercial valuation, depending on the number of rooms and various things. That’s a bit more bespoke.
Ideally, you’ll have increased the value of the HMO before you refinance it. You get back the money you borrowed in the first place, the lender gets paid off, and then you get some extra money back to go again and do another one.
So the most likely exit is to refinance. I’m not sure you would necessarily buy a property, turn it into an HMO and then try and sell it. But that is an alternative – all exit strategies count, but refinance is the main one.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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