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This month, I want to look at the options for financing HMOs that we have – do you want to use a standard ‘vanilla’ lender, or is it worth looking at a more commercial option?
For a few months, more commercial lenders have been out of the market in terms of rate and service, but they are back as I mentioned last month. The difference in rate between them and the more vanilla lenders has reduced too, so although rates are higher now across the board there is more reason to consider the commercial lenders.
Today I want to examine the pros and cons to help you decide who you should consider. Its always best to speak to your mortgage broker about your personal circumstances, but here’s what to consider:
Valuations
This is the big one, so let’s look at it first! Most lenders will only look at a bricks-and-mortar value for HMOs up to and including 6 bedrooms. This means that Connells or Countrywide will value it, and they will only be able to use sold comparable evidence to back up their figure – that doesn’t mean other HMOs either! Where you are in an Article 4 area, or it’s 7 bedrooms or more, you will get a commercial valuation, but it will still be from Countrywide or Allied, who in my experience aren’t very generous!
The big differences with a specialist lender are the methodology and the choice. They will ask the valuer to value the property as an HMO (have a listen to my podcast with Andy for more information on this), and we will have the choice of a valuer. This means that if an investor you know has had a valuation you were happy with then we can ask them for a quote. If you have used someone for the purchase of the property before your refurbishment then we can use them again. This allows you to build relationships with a valuer if you are looking at multiple projects in the same area too, adding another string to your power team!
We typically see a 10-15% uplift from bricks and mortar to commercial valuations as a ballpark figure, there are more details as I mentioned on my podcast.
Legals
The legal process does vary from lender to lender, Shawbrook offers something that others don’t so I will use them as a good example to show how it’s not just the interest rate you need to compare. Shawbrook has a title indemnity policy like no other lender, so they need very little from your solicitor! If you are refinancing a property then most of the time, you don’t even need a solicitor, so this will save your legal costs and mean you can complete so quickly. We have completed many refinance within a week – saving a month or two of interest, especially when you are on a bridge is a huge saving.
It is always worth looking at the options regarding solicitors on your purchase and refinances, and being mindful of the costs and timescales. We can be far more involved with the legal with specialist lenders – the lenders will copy us into all correspondence, and they have dedicated completions officers to help push your case through. The vanilla lenders just don’t have these so you’re on your own for much of it, although we will always help when we can.
Companies House Charges
Lenders want other charges when it is Ltd company lending, which often isn’t discussed when comparing limited company mortgage options. Vanilla lenders have a ‘belts and braces’ approach, as we say. They will always want each applicant to sign a 100% personal guarantee with ILA, a debenture on the company, a floating charge, negative pledges and some will strap it up with an All Monies Charge. These add more to the admin pile of documents and additional costs to your legal fees, so it is worth bearing in mind. They are all about protecting the lender, so it is really important to understand these. Debentures mean every future mortgage in the same company needs additional legal costs too, so it’s not just a one-off.
The specialist lenders are more reasonable! They don’t usually require a debenture at all and don’t usually need independent legal advice either for non-vulnerable applicants. Personal guarantees are usually still at 100%, except for Shawbrook who sit at 25% per applicant with a minimum of £50,000.
As you look to create a portfolio of properties, these things need to be understood and considered. What we tend to find is that the more properties our clients buy, the less rate conscious they become as they realise the potential impact of all of these charges.
As always, if there is anything you’d like to discuss then please get in touch here.
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.