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Buy-to-let landlords may struggle to remortgage after licensing rule change

New rules may set to come into effect in October

Buy-to-let landlords may struggle to remortgage after licensing rule change

Some investors could find themselves struggling to remortgage their properties after new licensing rules for Houses in Multiple Occupation (commonly known as HMOs) coming into effect in October.

That’s according to the specialist buy-to-let lender Commercial Trust Limited, which has stated it expects to see an uptick in landlords applying to refinance their portfolios as the changes come closer.

An additional 177,000 properties are likely to require licences after the regulations kick in later this year.

Here, we take a look at the new HMO licensing rules and offer advice on how mortgages work for this type of buy-to-let investment.


What is a House in Multiple Occupation (HMO)?

Houses in Multiple Occupation (HMOs) come in many forms, from large shared properties to converted flats and privately operated halls of residence.

Generally speaking, a property where three or more unrelated people from more than one household live together and share a toilet, washing or cooking facilities could be classified as a HMO.

Currently, only a limited number of landlords operating HMOs in England and Wales need licences for their properties.

Licenses, which last for five years, are required if:

  • The home is rented to five or more people from more than one household
  • The property is at least three storeys high
  • The tenants use shared facilities

But these rules are set to change from October this year, with more landlords to fall under licensing schemes.

Editor’s note: This article previously slated ‘properties at least five storeys high’ require a licence – this has been corrected to ‘properties at least three storeys high’. 

How is HMO licensing changing?

From 1 October, the HMO licensing regulations are being tightened, with smaller properties set to need licenses, and new rules being brought in around living space.

The Residential Landlords Association (RLA) says these changes could result in 177,000 more homes needing licences.

Upcoming changes for HMO landlords include:

  • Minimum room sizes to be introduced: bedrooms used by one adult must be a minimum of 6.51 sqm, those used by two must be 10.22 sqm. Bedrooms occupied by children aged 10 or younger must be at least 4.64 sqm. Local authorities can increase these limits if they wish.
  • HMOs which are less than three storeys will need to be licenced. This includes flats in converted buildings and those situated above and below shops.
  • Landlords who already have licences will need to ensure their properties are compliant if they plan to renew. Where a property is found to be non-compliant, the landlord will be given 18 months to make changes.
  • Any HMO occupied by five or more people from two or more households must be licenced.

Landlords face remortgaging struggles

The buy-to-let lender Commercial Trust Limited believes there will be a spike in enquiries from landlords looking to refinance their portfolios as the deadline comes closer, and has warned of the difficulties some landlords might face when remortgaging.

If, for example, one bedroom in the property fails to meet minimum licensing standards, lenders may take this into account when the landlord tries to remortgage.

Andrew Turner of Commercial Trust Limited says:  ‘Investors looking to remortgage may find that a lender will only base rental stress calculations on rental income from the bedrooms that do meet local licensing rules.

That could make obtaining the required level of financing a lot tougher.’

  • The government has published a guidance document on the extension of mandatory licensing for people operating smaller HMOs.

Five things you need to know about HMO mortgages

Some traditional buy-to-let investors have moved across to HMO investment following a raft of regulatory changes in the property investment industry, but it’s not for everyone – HMO investment can be a complicated business and is best taken on by experienced landlords.

Here are five basics you need to know about getting a mortgage on a HMO.

  • 1. Lenders will generally assess the potential rental income for mortgage purposes as if the property will be let as a family unit.
  • 2. Mortgages for HMOs are more expensive than those on offer for traditional buy-to-let properties.
  • 3. Often, fees are more expensive too. This is because lenders will make HMOs undergo a specialist valuation process.
  • 4. People considering investing in HMOs need to make sure they seek independent tax and legal advice.
  • 5. HMO lending often goes hand in hand with limited company buy-to-let – when experienced landlords set up limited companies to manage their portfolio, rather than acting as individual investors.
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