HMO Bridging Loan
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HMO Bridging Loan
Scott West explains how bridging loans work for HMO properties – or Houses in Multiple Occupation.
Can I get a bridging loan for HMOs?
Yes, you can. Bridging loans are commonly used for HMOs – either for purchasing or converting properties into HMOs.
What is the typical Loan to Value (LT) ratio available for HMO bridging loans?
HMOs are ultimately residential properties. Most lenders will offer 70% or 75% Loan to Value on those, as the gross loan when bridging. We can get slightly higher if it’s a refurb loan.
Perhaps you’re purchasing something to convert into a HMO – or it’s already a HMO, but requires refurbishment and modernisation.Some lenders will use the Gross Developed Value (GDV) and give you a slightly higher LTV. It depends exactly what you’re doing, but most of the time it’s safe to expect 70% to 75%.
What are the typical lengths of bridging loan terms available for HMOs?
Most commonly you’ll get 12 months, but we can get terms up to 24 months. Some lenders will let you select a time period shorter than 12 months, if you can demonstrate that the work involved or the exit strategy will be done sooner – in six months, for example.
Using a shorter term, you can potentially increase the net loan, because there’s less retained interest. We can play around with the numbers to fit the circumstances required. But most of the time, a 12-month term is the standard.
How is affordability calculated for an HMO bridging loan? Is rental income taken into account?
Bridging loans are typically not affordability-based calculations. This is asset based lending. It’s based on the value of the asset, and because no payments are being made on a monthly basis, there’s no requirement to prove your income.
That said, lenders will look at the viability of the project. If you’re purchasing a property that’s going to be converted into a HMO, they’ll want an estimate of the rental income. They need to be sure that once it’s all finished, it fits affordability with an HMO Buy to Let lender.
Questions will be asked during underwriting about the rental income expected and how that works with the lender and affordability, but it doesn’t directly impact your lending amount for the bridging loan. It’s just to ensure the loan is paid back fully.
How quickly can the funds be released after application approval?
Bridging loans can be done in four or five weeks from start to finish. Once the loan is fully approved, with valuation and underwriting done, we can get it through in five to 10 working days, depending on requirements.
The quicker you need it, the more expensive it’s going to be, generally, because we have a smaller pool of lenders who work that fast, and their prices are reflective of the timescales.
If you’re not in any real rush, or you’re buying at auction, four or five weeks is a typical timeframe.
Can I use the bridging loan to fund renovations or improvements to the HMO? Are there any conditions?
Many lenders will allow you to refurbish during the term of their product. Some will even fund the cost in arrears. When we apply for a bridging loan to acquire an HMO property, we can also give the lender a schedule of works outlining how much you need to spend and how long it’s going to take you.
The lenders will often fund 100% of those works. The loan has to fit the gross developed value. If so, they often fund 100% of the work in ‘drawdowns’.
You’ll buy the property today with the loan from the bridging lender. Then you might spend £20,000 doing the first bit of work. You send invoices to the bank, and they pay you back the £20,000 you spent. Next you do another £20,000 worth of work – or whatever needs to be done. Lots of lenders allow that. It can be quite cost effective in terms of personal cash flow.
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Can I get a bridging loan for HMOs that require planning permission, changes or refurbishment?
Yes, you can. It depends what the property currently is. If, for example, it’s a commercial property you’re turning into a HMO, like a care home or an office block, that can all be done.
We need to understand where the asset is, what it’s worth and your background. That helps us pick the right lender. You can absolutely use bridging loans for properties that require a change of use or refurbishment at any level.
Can the bridging loan be used to purchase at auction?
Definitely. Auction finance is something we’ve covered before. It is exactly the same as a bridging loan, just with lenders that have better timescales.
Most will have a 28-day timeline for auctions, but the auction house you speak to will confirm their requirements in advance.
How do I apply for an HMO bridging loan and what documentation will I need to provide?
The process is fairly straightforward through us. The standard things you need are proof of ID and proof of address, using your passport and driving licence.
Then it’s the details of the property you’re purchasing – or you already own. We need to understand the exit strategy – most times it will be a refinance. We’ll work to explore what the rental income will be, the GDV and which lenders are appropriate for you.
We’ll do a Decision in Principle with those lenders to confirm that the exit will work. Then you’re comfortable, we’re comfortable and so is the bridging lender.
If there’s a refurb involved we’ll need a schedule of works – and we can help you pull that together. That’s about it from your side. Obviously the solicitors will do their due diligence at the relevant time and a surveyor will do a valuation report. But to get started, you need very little.
What exit strategies do you typically see for HMO bridging loans?
Primarily with HMOs, the intention is to keep the property. You’ve converted it from a relatively low yield property into a HMO for a better rental income. You’re keeping that to drive your own personal income.
Some people do sell them. They’ve turned it from whatever it was into a large HMO or multi-unit, and sell it at a higher value. They just flip it, basically. But the majority of people on these projects tend to keep them for greater cash flow.
What else do we need to know about HMO bridging loans?
Just be aware that not all bridging lenders are the same. Some are more comfortable with HMOs than others, particularly if there’s a refurb or a change of use involved. Picking the right lender from the start will massively improve your experience.
You’ll have fewer headaches, an easier process and you’ll get the right outcome from the start. It’s not about using the first bridging lender you find online – it’s really not that simple.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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