Lenders perspective: HMO vs multi-unit freehold block vs short term lets vs assisted living

At OnPoint Mortgages we have always worked with many houses in multiple occupation (HMO) investors attracted by the yields. A HMO is classified as a property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen. Landlords can often achieve upwards of 8 to 10% compared to a UK average of around 5% for single tenant properties. Due to separate tenancy agreements voids are spread and affect only a proportion of income, reducing the risk of payment shortfalls. Mortgage options for HMO’s are plentiful in the specialist market, with lending options available for smaller and larger HMO’s, experienced and inexperienced landlords, as well as student or working tenants. Lenders such as Kent Reliance can even go up to 80% LTV.

As with any investment there are always things that you should carefully consider. Managing a HMO can be more challenging than a single let property, there are increased running costs and new licensing schemes can be introduced by local authorities. The pandemic has also seen added complications for some landlords in certain locations. Being Sussex based, we have seen this particularly around the Gatwick area with clients reporting an increase in rental voids within their HMO’s. This has led to a number looking at new investment opportunities.

Like HMO’s, funding for multi-unit freehold blocks (MUFB) are well served by the specialist mortgage market with products again up to 80% LTV. First time landlords are typically restricted to purchasing smaller properties containing 10 apartments while experienced customers can access lending for much larger blocks. A MUFB is defined as multiple, separate, independent residential units held under a single title. Due to the separate tenancy agreements voids are again spread across each flat. In addition, it is easier to carry out refurbishment works on one of the units without disturbing the other tenants. You have the flexibility of creating separate leases on each apartment and selling them individually or keeping it all under the one freehold. If under one freehold, providers can also consider a block containing smaller sized flats or studios.

Short term lets were generally difficult to fund, especially if you were purchasing within a limited company or if it was in an area without a demand from holiday makers. With the increase in staycations, funders have become more comfortable with this proposition and options are expanding. This is the case even for those properties that only have a demand from contractors, business travellers, city visitors or emergency accommodation. Maximum LTV is 75% and lenders include Foundation Home Loans, The Mortgage Lender and West One. West One are even able to consider MUFB short term lets.

Holiday lets are still subject to full mortgage interest relief and the returns can be impressive. If the property is leasehold, you must ensure that it does not prohibit sub-letting and be aware that regulation may come into place around serviced accommodation. Short term lets need to be managed as a business due to the quick-change over in tenants and the cleaning of the properties between stays is essential. One of the biggest increases in enquiries over the last few months has been from landlords looking to let their property to an assisted living service provider. This is usually based on a 3 to 5 year fully repairing lease, rent is higher than that on the open market and no voids.

Many of these charities crying out for good quality accommodation but it has been extremely difficult to find suitable lending. This is because lenders have concerns around ‘reputational risk’ in the event they must repossess a property containing vulnerable tenants. Thankfully lenders are slowly becoming available with West One and Together offering a product in the right circumstances. The demand is there, we wait to see if funders adapt policy and provide a solution. We will be keeping an eye out for criteria changes in the coming months across all four strategies and I would be keen to hear feedback from those engaged in them.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Some forms of buy to let mortgages and some forms of commercial lending are not regulated by the Financial Conduct Authority.

Lee Langley is the Principal Mortgage and Protection Adviser at OnPoint Mortgages. OnPoint Mortgages a trading style of L&D Mortgages Limited is an appointed representative of The On-Line Partnership Limited which is authorised and regulated by the Financial Conduct Authority. Registered address: 25 Homefield Road, Bushey, Hertfordshire, WD23 3AP. Registered in England & Wales under 10500099

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