Photo by HemCo Property Investments

This month, I want to take it back to basics and talk about how to structure the purchase and refinance of an HMO.  I have spoken to several people recently who have asked how it all works so I thought I’d summarise it for you.

Stage 1: Purchasing your property – what to think about.

You will need a bridge to purchase your property if it is not in a lettable condition, doesn’t have an HMO licence (or could not get one), EPC, or needs work carrying out.  I know there are investors who like to avoid bridging, but we are seeing more and more that lenders want you to do things the right way so it’s more important than ever not to use a standard mortgage to purchase the property. Lenders ALWAYS find out!

Bridging can work one of two ways.  Either it can fund money towards the purchase and you fund the works for the refurbishment/conversion.  This is only viable when the build costs are lower (under about £60k), or if the property isn’t profitable as a project on its own.  Some lenders will leverage up to 80% or 85% of the purchase price to give you that bit extra.  The important factor is remembering that you need to repay your bridge, and that loan will never be more than 75% of your post-works value (GDV).

The other way to use bridging is for the lender to fund some of the purchase, as well as the refurbishment works.  The maximum loan is always worked out from the GDV, and it is usually 65-70% of this figure.  You then deduct all of the work costs, as they will always fund them in full.  What is left covers your day one loan (towards the purchase), as well as fees and interest.

If you have a profitable deal, then it will be capped at 70% on the day one loan.  The works are funded in arrears, so you need to have some funds (about 20-25% depending on the cost) to start the works.  The minimum day one loan is £150,000 so this doesn’t work for all cases.  We can have a chat about the options on a case-by-case basis and see which option best suits your circumstances.

Valuation: You will need to provide the valuer with a schedule of works to include a breakdown of the costs, floor plans and timescales.  The valuer then needs to confirm that this is realistic – so there is no point underestimating these costs!  The valuer will give an end value (GDV) at this point too, so the more accurate your schedule is, the more accurate your GDV will be too.

We will need to see all these funds in your bank account, so you need to have the money.  Gone are the days of using credit cards and borrowing to fund the refurb!

My top tips for bridging would be:

1. Estimate the costs and timescales realistically. You will only be disappointed when it doesn’t go perfectly to plan!
2. Use a broker who will be able to do the bridge and term (like us!) and ideally a lender who will lend for the bridge and then can offer term mortgages for the property; this can reduce costs and give you more certainty over your exit.
3. You don’t need a property that is mortgageable, so find one without a kitchen or bathroom, or one with some issues that you are happy to resolve which could put off other potential buyers. This is where you are more likely to add value to your project.

Stage 2: The refinance process

Remember to keep in touch with your broker as you go along the refurbishment so that you can start the refinance process as early as possible.

What to consider when choosing your lender for the refinance:

1. Which valuer you can use and the valuation methodology – Make sure you know what the valuer said regarding the GDV on your bridging report to see if a commercial valuation is achievable.
2. Can you use the same lender as you used for the bridge? This will save fees and legal – and time!  It’s worth balancing out all the costs.
3. Has the Land Registry been updated to show you as the owner? We cannot complete the refinance until this has happened, so it is worth keeping an eye on.  We can expedite the process with HM Land Registry, but only once we have a mortgage offer– and there are lenders who won’t offer before it’s been updated, not helpful!!
4. The interest rate. There are several reasons that the rate isn’t the most important factor. For example, if you are refinancing within 6 months; there was a large uplift to the purchase price, or you require a commercial valuation.  These circumstances will affect the lender and means to achieve the maximum LTV, you will have to compromise on the rate.

How does the refinance application work?

1. We usually start the process a month before the property is finished. This allows us to discuss the property and the lender options, then apply – with a bit of room in case there is an issue!
2. We will book the valuation for when the property is finished, but before you have tenants in. The property always looks more presentable before they move in, and it saves having to arrange access with them all.
3. Once we have the valuation back and you have provided all the documents the lender has requested, it will be reviewed for a formal offer.
4. When we have the offer, the solicitors will be instructed. If we are staying with the same lender, then this will be minimal and take a week or so; if we are moving lenders then it is a full legal process and can take 4-6 weeks depending on the lender and solicitor.  With the specialist lenders, we have more control over this process; we are copied into emails, have access to documents and can move things through a bit quicker, particularly at legals, as due to their volumes, it can be very time-consuming!
5. We may need the property to be let prior to completion, so start marketing your rooms as soon as possible.
6. HMO licences – Most specialist lenders do not require an HMO licence but will need confirmation that the council will grant you a licence and you have paid for it.
7. On completion, the bridge is paid off and the rest is paid to you – hopefully ready for the next project!

I hope this has been useful.  As always, if you want to chat about a particular case then please contact me here and we can run through the details.

About the Author:

Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.