Following the Bank of England’s (BoE) decision to increase the base interest rate from 0.1% to 0.25% in December 2021, this increase has begun to filter through to the mortgage market, which has pushed up the cost of most fixed and variable rate deals.
During the BoE’s latest Monetary Policy Committee meeting held on 3 February 2022, the committee decided to increase the base interest rate to 0.50% in light of surging inflation.
This is the first back-to-back rate increase since 2004 and is the highest base interest rate since before the COVID-19 pandemic. With further hikes expected throughout 2022, the cost of borrowing on mortgages is expected to continue to rise overall.
So, what does this mean for the HMO mortgage market? In this blog post, we’ll cover what’s happening with interest rates, inflation, and mortgage product choice, in addition to tips for how HMO investors can get themselves into a super lendable position.
Mortgage Choice at High Levels
Mortgage availability as a whole has continued to improve in recent months. According to Moneyfacts, product choice has recently hit a 13-year high, but it now appears to be leveling off.
Additionally, the level of mortgage choice for landlords specifically had increased for the eighth consecutive month in January. HMO lending is also back to pre-COVID criteria, and many lenders who exited the market during the pandemic have returned.
At the start of the year, the number of deals for landlords improved across all loan-to-value (LTV) tiers, and this continues to provide more opportunities for us! HMO investment, in particular, is gaining popularity, which is boosting appetite for these specialist mortgages, and lenders appear to be following suit.
Rising Interest Rates Meet Increasing Inflation and Energy Costs
At the moment, interest rates are still historically low, so there are competitive mortgages out there. Recently, some lenders have even announced rate reductions to certain HMO deals, but that’s unlikely to continue for long. Make sure you’re prepared for interest rates to increase and understand how this will impact you and your portfolio.
On top of rising interest rates, HMO landlords, along with other households, are facing spiralling energy costs and inflation, which is creating a triple whammy. Inflation has surged to a 30-year high, and the BoE has warned that it could hit as high as 7.25% by April.
This has led to the worst cost-of-living crisis since records began. Much of current inflation increases are due to soaring energy prices. The regulator Ofgem recently increased the energy price cap by £693 per year. This is a rise of 54% and will come into effect from April. An additional rise is expected in October as well, so this could get worse.
These factors can have consequences on HMO performance and are some of the biggest changes the HMO industry is seeing, but don’t fret. There are ways to manage the impact of these. Make sure you’re prepared for rising costs and work on safeguarding your business.
5 Tips for How HMO Investors Can Get in a Super Lendable Position
With interest rates rising, it’ll become more important for you to find out how to maximise the interest rate and mortgage deals you can secure. Here are some of our top tips for how HMO investors can get themselves in super lendable positions, which can help lessen the impact of rate increases.
1. Make your credit score, deal analysis, and entire deal prospects as strong as possible.
Having a great credit score and strong prospects and evaluations for every deal can make the bank feel confident and comfortable lending to you. When this happens, they’re more likely to lend to you for cheaper and longer. And with rising costs and inflation, make sure you effectively analyse what a HMO deal might look like under any circumstances.
2. Get yourself into a position where you don’t need to borrow as much from the bank.
If you can master the other three pillars of HMO funding, including knowing your numbers, raising private finance, and recycling capital, you can find additional ways to access the money that you need. This will allow you to get better deals from the bank and be able to proceed quicker.
3. Understand what’s happening in the mortgage market.
Mortgages can ultimately help HMO investors scale a sustainable and profitable HMO business. I would personally say they are essential to any investor who wants to build a portfolio quickly. This is why it’s so crucial to keep up to date with what’s going on in the mortgage market.
4. Have the right mortgage broker on your team.
Mortgage brokers can advise you on the best deals for your financial and personal circumstances as finding the right one can be a minefield. They can also help you understand lenders’ varying criteria and help you navigate the entire property purchase, so you can benefit from their experience and knowledge throughout the entire buying process.
5. Master the art of applying for HMO mortgages.
As HMO mortgages are still considered to be a special type of mortgage, applying for one can be complicated. While lending requirements and assessment criteria can vary among lenders, it’s important you’re fully aware of the most common considerations. And find ways you can strengthen your mortgage application and rental income statements (legitimately of course).
One of the biggest things about property investment is that you can leverage your investments. Mortgages can help you do just that. It’s an incredible concept that you can take advantage of to scale your business, and getting yourself in a super lendable position can allow you to do this more quickly.
Mortgages are a crucial part of the second of five stages of The HMO Roadmap, which is about funding. For more training on how to start, scale, and systemise your HMO business, become a member of The HMO Roadmap. And if you’d like to speak to our mortgage broker, send an email to info@staging.thehmoroadmap.co.uk.
About the Author:
Andy Graham is the founder and the lead trainer at The HMO Roadmap! He is also the co-founder of The HMO Mastermind and Smart Property, a specialist HMO property investment and management company. He writes as a regular columnist in different magazines about a variety of HMO topics and is the host of The HMO Podcast! Follow Andy on Instagram!