Changing buy-to-let to HMO Mortgage
Scott West explains how you can change a buy-to-let to an HMO mortgage.
Can I convert my buy-to-let mortgage to an HMO mortgage?
You can. An HMO sits with a different group of lenders to a standard buy-to-let, so the move usually means changing lender. If your current lender writes HMO business, a product switch with them may be possible; in most cases, though, you will remortgage in full to make the change.
Do I need permission from my lender to switch from a buy-to-let to an HMO mortgage?
Yes. Your lender must approve the conversion before any work begins, and the property needs to sit on an HMO product before you let it. A buy-to-let mortgage and an HMO mortgage are built for different purposes, and the two are not interchangeable.
Lenders treat HMOs as the higher-risk proposition. Tenancies are shorter, tenants' priorities differ, and the condition of the stock is often weaker — anyone who has seen a let to students will recognise the pattern.
Converting a single buy-to-let, particularly one that has housed a family, frequently calls for a good deal of refurbishment. Lenders are cautious here, and some do not offer HMO products at all.
What are the steps to remortgage from a buy-to-let to an HMO mortgage?
The mechanics are straightforward: it is a remortgage. You select a lender and a product suited to the property, with the choice shaped by the number of bedrooms.
More than eight rooms, or six with some lenders, puts the property in large HMO territory; below that, it is a small HMO. The distinction affects pricing. Some lenders treat anything above 10 rooms as commercial.
From your side, the experience differs little from any other remortgage with a new lender — a Decision in Principle, submission, valuation and legal work, in the order you would expect.
The one addition worth attending to early is the local council. Confirm whether the area requires a licence to operate an HMO before you commit to works and the cost that follows them.
Are there extra fees involved in converting from a buy-to-let to an HMO mortgage?
There can be additional costs. The lender's arrangement fee may sit higher than you have seen on a standard buy-to-let, and valuation fees tend to be higher because the report goes further — assessing the property's viability as an HMO, the likelihood of letting, the area and the type of tenant it attracts.
Where the council charges a licensing fee, factor that in too. The remaining mortgage and legal costs should be much the same. Any arrangement fee will most often be charged as a percentage, in line with most buy-to-let products today.
What are the legal requirements for converting a property to an HMO?
The legal position varies by area, and a licence is likely. Confirm it early, because where the area requires one you cannot let the property without it. A property able to house five or more tenants from different households will, in most cases, fall within the rules.
You will need to meet fire safety regulations, and room sizes matter. A room smaller than 6.51 square metres — the mandatory HMO licensing minimum for a single adult in England — cannot be used as sleeping accommodation, and lenders examine undersized rooms closely.
On the building side, an architect may be needed. Structural work can require building regulations sign-off, depending on the scope.
If the layout already lends itself to the use and the work amounts to little more than fitting locks and reorganising the kitchen, the cost will be modest. A full refurbishment is a different matter.
What types of properties are suitable for an HMO mortgage conversion? Does my property need to meet specific criteria for an HMO mortgage?
In principle, any property can serve as an HMO, provided you make it suitable. That means locks on the bedroom doors, a shared kitchen, shared bathrooms and access through a single main entrance.
You cannot have some rooms reached from the rear of the house and others from the front. As long as that single point of access works, the property can function as an HMO.
Room sizes carry weight, and very small rooms can be a sticking point for some lenders — anything close to the 6.51 square metre licensing minimum will draw scrutiny.
If you are reconfiguring rooms, keep the layout sensible. Lenders look to saleability in the event of a repossession, so avoid changes that could not be reversed without much difficulty.
Do I need a deposit to change from a buy-to-let to an HMO mortgage? How much deposit do I need?
If you are converting a buy-to-let you already own, there is no deposit to find. The equity is already in the property.
As a buy-to-let, it will almost certainly hold at least 25% equity. You should not need to add to the deal, and a 75% loan-to-value HMO product is often achievable, subject to the area and the loan size.
There will, of course, be legal costs, building costs and potentially other professional fees attached to the conversion.
Do I need an HMO licence to remortgage?
If the property qualifies and sits in an area where HMO licences are required, you will need one. Without it, a lender will not advance the mortgage.
An unlicensed HMO might exist in such an area as a pre-existing arrangement, but it would not stand for long — and you certainly could not obtain a mortgage against it without the licence.
Speak to your local council, confirm whether a licence applies, and if it does, apply as early as you can.
How do interest rates differ between buy-to-let and HMO mortgages?
Rates differ, and so does the choice of lender. Not every buy-to-let lender offers HMOs, though every HMO lender will also write buy-to-lets.
HMO rates sit slightly higher than a standard buy-to-let, reflecting the greater risk the lender takes on.
They are comparable to the rates on multi-unit freehold blocks — where, for example, a terraced house is split into an upstairs flat and a downstairs flat to create multiple units on one freehold. That is another route landlords often weigh up.
Will my mortgage repayments increase if I switch to an HMO mortgage?
That depends on your loan amount and the interest rate. Because HMO rates are higher, you will usually pay more — unless you reduce the balance during the remortgage, or the property has risen materially in value.
Against that, the HMO model tends to generate considerably more rental income, so the position is one of swings and roundabouts.
Can I stay with the same lender when converting to an HMO mortgage?
Some lenders write HMOs and some do not. Among those that do, some will allow you to remortgage back to them, while others will not. Where you took the original buy-to-let with a lender of that second kind, you could not remortgage back to them on an HMO basis and would need to move to a different lender.
Much therefore turns on who currently holds your loan. It can be done, but not every lender will accept it.
How long does it take to convert a buy-to-let to an HMO mortgage?
The remortgage typically runs eight to 12 weeks, much like a standard buy-to-let. From a client's point of view, the process is all but identical.
Provided your documents are ready at the outset, as with any buy-to-let, the timeframe should follow much the same path.
What happens if I convert my property to an HMO without telling my lender?
Converting without telling your lender breaches your mortgage terms, which can bring penalties or a demand for immediate repayment. The lender may recall the loan, or repossess if the balance cannot be settled quickly.
There is also the risk of being recorded for mortgage fraud, which would weigh heavily on your ability to raise mortgages and finance in future. It is not a step to take.
How can a broker help here? Is there anything else you'd like to add?
A broker's role is to identify the right lender and product, work through the legal and valuation points that need covering, and package the case in full for the lender.
In short, we make sure the case is presented at its strongest and keep matters moving as smoothly as possible from start to finish.
Some lenders are broker-only and cannot be approached directly, which is a further point in favour of using one.
Your property may be repossessed if you do not keep up with your mortgage repayments.
Most buy-to-let mortgages are not regulated by the Financial Conduct Authority.
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