HMO Bridging Loan

Hello, and on this episode of the Bridging Finance Podcast, Scott is here from Properties to explain how bridging loans work for HMO properties. It's great to chat with you as always, Scott. How's it all going? Yes, and you? Very well, thank you. Very well. Good. Good. I'm glad to hear that. Let's get straight into the questions that we've got here then. So of course, we'll start here. Can I get a bridging loan for HMOs people would like to know? Yes, you can. Bridging loans commonly be used for HMOs either purchasing or when people want to convert properties into HMOs. So existing residential units into HMOs. So yeah, they can be used for those. OK, brilliant. Well, there we go. Let's follow on with this next question then.

So what is the typical loan to value or LTV ratio available for HMO bridging loans? So HMOs are residential properties ultimately. So most lenders will offer 70 or 75% loan to value on those. That's the gross loan when it comes to bridging. Some cases, we can get slightly higher if it's a refurb loan. So if you're perhaps purchasing something, it's going to be converted into HMO or requires some it's already HMO, but it requires some level of refurbishment and modernisation. Some lenders will use the GEV, the gross developed value and give you a slightly higher loan to value. That depends exactly what you're doing. But for most of the time, expect 70 to 75% loan to value. OK, so that answers that there.

That's clear. Let's move on to this question. What are the typical lengths of bridging loan terms available for HMO? Most commonly, you'll see 12 months, but we can make the term up to 24 months. Some lenders will let you select a time period shorter than 12 months if you can demonstrate that the works involved or the exit strategy will definitely be done within a shorter period of time. So maybe six months, for example, by using a shorter term, you can potentially increase the net loan because there's less retained interest. So we can we can play around with the numbers to fit the circumstances required, basically. But most of the time, then we issue 12 month terms as a standard. OK, so that just gives you an idea there and some points to bear in mind.

You mentioned exit strategies or strategy there. We will talk about that in more detail later on in the episode. But let's move on to this question just to go into a little bit more detail. So how is affordability calculated for an HMO bridging loan? Is potential rental income taken into account? So bridging loans are typically not affordability based calculations. They're just asset based lending. So it's based on the value of the asset and there's a loan for it because there's no payments being made on a monthly basis. There's no requirement for income to be approved. Now, that said, some lenders will look at viability for project. So if you're purchasing a property that's going to be converted into a HMO,

they will want an estimate of what the rental income will look like because they need to be sure that once it's all finished, it fits affordability with a buy to let lender or HMO buy to let lender. There is a couple of questions that will be asked in underwriting about the rental income expected, how that works with a lender and affordability. But it doesn't directly impact your lending amount for the bridging loan. It's just a question they want to understand to ensure the loan is paid back fully. OK, which hopefully makes sense there. And again, some points to bear in mind. Let's continue on then. So people would like to know as well, how quickly can the funds be released after application approval?

So from start to finish bridging loans can be done in four or five weeks. Once the loan is approved, fully approved, that's valuation and underwriting points done, we can get them done as quickly as five or 10 working days. Right. You know, requirements. The quicker you need it is a general thumb. I say the quicker you need it, the more expensive it's going to be generally because you're asking if you want something done really, really quickly. We have a smaller pool of lenders that do that and their prices are reflective of the timescales. So if you're not in any real rush and you're buying an auction or something, four or five weeks is a typical kind of time frame. OK, so again, that just gives you an idea of the time frame there.

We're getting through these questions now, so let's move on. Let's look at this one. So can I use the bridging loan to fund renovations or improvements to the HMO? If so, are there any conditions? Good question. So many lenders will allow you to do refurbishing during the term of their product. Some will even fund the cost of those refurbs in arrears. So in the example of you found a property that you want to convert to HMO, for example, when we go for the bridging loan to acquire the property, we also give the lender a schedule of works outlining how much you need to spend on what, how long it's going to take you. The lenders will often fund 100 percent of those works. The loan has to fit within a certain loan to value,

to the gross developed value, to the LTV against the GVV has to work. But they will often fund 100 percent of those works in what we call drawdowns. So you'll buy the property today with the day one loan from the bridging lender to purchase, then you'll spend 10 or 15 thousand pounds, 20 thousand pounds, depending on what the property is, doing the first bits of work. You send the invoices to the bank. The bank then pay you back the 20 grand you spent, and you do the next 20 grand for that grand worth of work, where it needs to be done next. So yes, lots of lenders will do that. It can be quite cost effective from a personal cash flow point to use those refurb products too. Right. OK, well, thank you for explaining that there.

The next question might cross over a little bit. Let's see. So 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. So if, for example, it's a commercial property into a HMO, so maybe it's a care home or office blocks. We've seen those done before because, you know, everyone's turning office blocks into flats these days and things. Cannot be done. We need to understand where the asset is or the assets worth your background. And that helps us pick the right lender. But absolutely, you can use them bridging loans for properties that require either change of use or just refer to various levels. OK, so good news again there if that's what you're looking to do.

Now, moving on to this question, can the bridging loan be used to purchase an HMO at auction? Definitely. Auction finance is something we've covered before. It is essentially exactly the same as a bridging loan, just with lenders that have better time scales, really. Most of them will have a 28 day timeline for the auctions, but the auction house you speak to will obviously take you that in advance. Absolutely. We can get them done. Yeah. OK, brilliant. There we go. Now, of course, if you've been listening to this episode so far, you're probably wondering, how do I apply for an HMO bridging loan? And what documentation will I need to provide? The process is fairly straightforward as they usually are with bridging loans

through us. So the standard things you're going to need to provide proof ID, proof address, so passport and driving licence, usually details of the property you're purchasing or if it's what you already own, details of it. The exit strategy is something we need to understand. So most times it will be a refinance. So we'll understand what the rental income is going to be, what the GDV is going to be, which lenders are appropriate for you. We'll do a decision of principle with those just to confirm the exit work so that you're comfortable and we're comfortable and the bridging lender is comfortable. A schedule works if there's a refurb involved, we can help you draft that together. That's about it, really, from your side of things.

Obviously, solicitors will do their bits in their due diligence at the relevant time. Value will go out and do the valuation report. But from you to get started, very little. OK, well, hopefully that's reassuring there to hear. But thank you for the breakdown, Scott, there. And it leads us nicely into that next question. Back to talking about the exit strategy. I'm not sure how much you've got to add now, but what exit strategies do you typically see for HMO bridging loans? Primarily, I see people doing HMOs, their intentions to keep the property because they've converted it from what would be relatively low yield into HMO, which has a higher yield, better rental income, basically. And they're keeping that for their own personal income and affordability.

Some people do sell them. I mean, they've created some value, turned it in from from whatever it might be. A lot of people's home into a very large HMO or more as a unit and they sell it at the higher value and they just flip it, basically. Some people do do that. But the majority of people I see doing these types of projects tend to keep them the greater cash flow. So, yeah, that's typically how I see people tend to go down the HMO route. OK, brilliant. Well, we've answered all of the questions for this episode, but Scott, have you got anything else you'd like to add? Any final thoughts or do you think we've covered all that we can here? Just that not all bridging lenders are the same. Some of them are more comfortable HMOs than others.

Particularly, there's a refurb or a change of use involved. So picking the right lender from the start will massively improve your experience through the process. Less headaches, easier process. You get the right outcome from the first time. So it's not about just googling the first bridging lender you find. No, you shouldn't then because it's not that simple.

OK, well, there we go. A great note to end on a key point. Scott, thank you for that as always. And I'm sure we'll catch you on another episode soon. Perfectly. For to please note some bridging finance is not regulated by the Financial Conduct Authority.