Financing HMOs and serviced accommodation: how lenders think

Standard buy-to-let lending is a commodity: dozens of lenders, similar criteria, automated decisions. HMO and serviced accommodation lending is a smaller, more specialist market where the property, the borrower's experience and the way the deal is presented all change the answer. This guide explains how those lenders think.

Who lends

A handful of high street banks lend on small HMOs. Beyond that the market is specialist lenders and building societies who understand licensing, room-by-room income and short-let operations. Most are only accessible through a broker, and the right broker knows which lender will accept a seven-bed sui generis conversion in an Article 4 area on day one and which will want twelve months of trading first.

Serviced accommodation has fewer lenders still. Some lend against the property as a normal buy-to-let and simply permit short lets; others lend against the short-let income, which needs evidence.

How the property is valued

This is the most important difference. A standard let is valued on bricks and mortar: what a similar house would sell for to anyone. A larger HMO, typically six or more bedrooms or with planning as sui generis, can be valued on a commercial or investment basis: the net rental income capitalised at a yield. On a well-run HMO that produces a valuation well above the vacant-possession value, which in turn supports more borrowing and is the mechanism behind the "buy, refurbish, refinance" strategy.

Smaller HMOs and anything the valuer decides is really a family house get bricks and mortar. Ask the broker which basis the lender will instruct before you rely on the higher figure.

Interest cover and stress tests

Lenders divide the rent by the interest at a stressed rate. For HMOs the rent is usually the gross room income less an allowance for bills and voids, so the stated rent roll is not the number tested. Typical requirements are 125% to 145% cover at a stressed rate of the pay rate plus two percentage points or a floor of around 5.5%, with limited companies and basic-rate taxpayers at the lower end.

For serviced accommodation, lenders who use the short-let income typically want one to two years of accounts or platform statements and will discount projected occupancy heavily.

Personal versus limited company

Company borrowing is standard in this market and most specialist lenders price it similarly to personal borrowing, with personal guarantees from the directors. Existing companies with a trading history and a clean credit file get the best terms; special purpose vehicles set up for the purchase are accepted by most lenders as long as the standard industrial classification codes are right and the directors have the experience.

Bridging to term

Conversions are usually funded by a bridging loan (for the purchase and works, typically at monthly rates of 0.7% to 1% plus fees) followed by a refinance onto a term mortgage once the property is licensed, let and producing income. The refinance is where the plan lives or dies: it needs the commercial valuation to land, the rent to meet the stress test, and the licence in place. Build the exit into the deal before you commit to the bridge, and have a plan for the scenario where the valuation comes in low.

What gets applications declined

• Buying an HMO without the correct planning use, or in an Article 4 area without permission.
• Rent figures that do not survive the lender's bills-and-voids deduction.
• No landlord experience for a first HMO of seven or more rooms; some lenders want a year of standard letting first.
• Leasehold flats for serviced accommodation where the lease prohibits short lets.
• Unlicensed properties presented as licensed, or licences in the seller's name that will not transfer.
• Adverse credit, unexplained deposits, or a company with the wrong SIC codes.

A checklist before you apply

1. Confirm planning use and licensing status in writing.
2. Build a room-by-room rent schedule with evidence of achieved rents nearby.
3. Cost bills, voids and management realistically, because the lender will.
4. Decide the ownership structure before the offer, not after.
5. Have the refinance lender identified before drawing a bridge.
6. Run the stress test yourself using our rental yield calculator, then leave a margin.

AIRPROP is not a mortgage broker and does not give regulated mortgage advice; we prepare the numbers and the case, and we work with brokers who know this market. Book a free call if you want a deal reviewed before you approach a lender.